EPA 230/1-74-038
August, 1974
ECONOMIC ANALYSIS
OF
PROPOSED EFFLUENT GUIDELINES
ANIMAL FEED, BREAKFAST CEREAL AND WHEAT STARCH
SEGMENTS OF THE GRAIN MILLS POINT SOURCE CATEGORY
QUANTITY
U.S. ENVIRONMENTAL PROTECTION AGENCY
Office of Planning and Evaluation
Washington, D.C. 2O460
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This document will subsequently be available
through the National Technical Information Service,
Springfield, Virginia 22151
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EPA 230/1-74-038
August, 1974
FINAL REPORT
ECONOMIC ANALYSIS OF PROPOSED EFFLUENT GUIDELINES FOR
ANIMAL FEED, BREAKFAST CEREAL AND WHEAT STARCH
SEGMENTS OF THE GRAIN MILLS POINT SOURCE CATEGORY
Samuel G. Unger
Robert!. Buzenberg
Alan H. Ringleb
^.vixownontal Protection Agency
Region V, Library
2"-) ?-->-vth Dsarbo'rn Street:
Illinois 606G* .;
Prepared for
Office of Planning and Evaluation
Environmental Protection Agency
Washington, D. C. 20460
Contract No. 68-01-1533
Task Order No. 13
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PREFACE
The attached document is a contractor's study prepared for the Office
of Planning and Evaluation of the Environmental Protection Agency
("EPA"). The purpose of the study is to analyze the economic impact '
which could result from the application of alternative effluent limitation j
guidelines and standards of performance to be established under sections '
304(b) and 306 of the Federal Water Pollution Control Act, as amended. |
The study supplements the technical study ("EPA Development Document")
supporting the issuance of proposed regulations under sections 304(b) and :
306. The Development Document surveys existing and potential waste '
treatment control methods and technology within particular industrial
source categories and supports proposal of certain effluent limitation
guidelines and standards of performance based upon an analysis of the
feasibility of these guidelines and standards in accordance with the require-
ments of sections 304(b) and 306 of the Act. Presented in the Development
Document are the investment and operating costs associated with various
alternative control and treatment technolpgies. The attached document
supplements this analysis by estimating the broader economic effects
which might result from the required application of various control
methods and technologies. This study investigates the effect of alter-
"^ native approaches in terms of producf price increases, effects upon em-
^ ployment and the continued viability of affected plants, effects upon
\^ foreign trade and other competitive effects.
\
The study has been prepared with the supervision and review of the Office
of Planning and Evaluation of EPA. This report was submitted in fulfill-
J ment of Contract No. 68-01-1533, Task Order No. 13 by Development
*' Planning and Research Associates, Inc. Work was completed as of
July, 1974.
This report is being released and circulated at approximately the same
time as publication in the Federal Register of a notice of proposed rule
making under sections 304 (b) and 306 of thV&ct for the subject point
source category. The study is not an official EPA publication. It will
be considered along with the information contained in the Development
Document and any comments received by EPA on either document before
or during proposed rule making proceedings, necessary to establish final
regulations. Prior to final promulgation of regulations, the accompanying
study shall have standing in any EPA proceeding or court proceeding only
to the extent that it represents the views of the contractor who studied
the subject industry. It cannot be cited, referenced, or represented in
any respect in any such proceeding as a statement of EPA" s views regarding
the subject industry.
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CONTENTS
Page
PREFACE i
EXECUTIVE SUMMARY 1
J. INDUSTRY SEGMENTS 1-1
A. Cereal Breakfast Food Segment 1-3
1. Types of Firms 1-3
2. Types of Plants by Segment 1-7
3. Number of Plants and Employment 1-9
4. Relationship of Segments to Total
Industry I-10
5. Likely Impacted Segments I-11
B. Wheat Starch Processing Segment 1-11
1. Types of'Firms 1-12
2. Types of Plants 1-14
3. Number of Plants and Employment 1-15
4- Relationship pf Segment to Total
Industry 1-15
5. Likely Impacted Segments 1-16
H. FINANCIAL PROFILES II-1
A. Cereal Breakfast Food Segment H-l
1. Plants by Segment II-1
2. Distribution of Data 11-11
3. Ability to Finance New Investment 11-13
B. Wlieat Starch Processing Segment H-14
1. Plants by Segment n-15
2. Distribution of Data 11-21
3. Ability to France New Investment 11-21
in. PRICING
A. Price Determination , ,- TII-1
1. Cereal Breakfast Food Segment T"-l
2. Wheat Starch Processing Segment III-3
B. Potential Price Change3 HI-5
IV. ECONOMIC IMPACT ANALYSIS METHODOLOGY IV-1
A. Fundamental Methodology IV-1
1. Returns IV-5
2. Investment IV-6
3. Cost of Capital - After Tax IV-7
4. Construction of the Cash Flow IV-8
B. Pric-j Effects IV-9
C. Shutdown Analysis IV-11
D. Production Effects IV-12
E. Employment Effects IV-12
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CONTENTS (Continued)
Page
IV. (Cont'd)
F. Community Effects IV-12
G. Other Effects IV-12
V. POLLUTION CONTROL REQUIREMENTS AND COSTS V-l
A. Pollution Control Requirements V-l
1. Ready-to-eat Cereal Manufacturing V-3
2. Wheat Starch and Gluten Manufacturing V-5
B. "Typical1' Effluent Control Costs V-6
VI. IMPACT ANALYSIS VI-1
A. Cereal Breakfast Food Segment VI-2
1. Price Effects VI-2
2. Financial Effects VI-4
3. NSPS Effects VI-12
4. Other Effects VI-12
B. Wheat Starch Processing Segment VI-12
1. Price Effects VI-15
2. Financial Effects VI-17
3. NSPS Effects VI-24
4. Other Effects VI-27
VII. LIMITS OF THE ANALYSIS VH-1
A. General Accuracy VII-1
1. Errors in Data VII-2
B. Current State of Waste Water Treatment
in the Industry VII-4
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ECONOMIC ANALYSIS OF PROPOSED
EFFLUENT GUIDELINES
FOR
ANIMAL FEED, BREAKFAST CEREAL AND WHEAT STARCH
SEGMENT OF THE GRAIN MILLS
POINT SOURCE CATEGORY
EXECUTIVE SUMMARY
The economic impacts of proposed point source effluent guidelines on
three grain mill products industry segments were assessed in this study:
(1) Cereal Breakfast Food, (2) Wheat Starch Processing, and (3) Animal
Feeds. The following brief summary highlights the purposes, procedures,
and findings which are developed in detail in the final report.
BACKGROUND
The primary purpose of this study was tp analyze the potential economic
impacts of proposed pollution abatement requirements on each of the three
above named industrial segments. Specific focus was placed on the analysis
of probable price effects, financial effects, production effects, employment
effects and community effects which ^re expected following implementation
of proposed point source effluent control guidelines.
This study was completed pursuant to the Federal Water Pollution Control
Act Amendment of 1972. Implementation of this Act, as amended, requires
that regulations for the control of effluents from industrial point sources
be developed and that effluent guidelines be established to meet Federal
clean water standards. The guidelines for the industry segments of this
study have been proposed in a separate development document. _!' Prior
to the imposition of such guidelines, however, an evaluation was necessary
of various economic impacts on the industry segments and the national
economy.
The study and final report were prepared under the supervision and review
of the Office of Planning and Evaluation pf the U.S. Environmental Pro-
tection Agency (EPA) by Development Planning and Research Associates,
Inc. (DPRA).
Development Document for Proposed Effluent Limitations Guidelines
and New Source Performance Standards for the Animal Feed, Breakfast
Cereal and Wheat Starch Segment of the Grain Mills Point Source
Category, Sverdrup & Parcel and Associates, Inc., April, 1974.
1
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SUMMARY AND CONCLUSIONS
In each of the segments, it is emphasized that most existing plants are
currently discharging their wastes into municipal treatment systems.
The guidelines proposed herein do not apply to such plants directly.
Hence, even in the case of wheat starch processing, the economic im-
pacts are quite limited on an industry-wide basis when considering only
the point source category guidelines of this study.
For the three industry segments studied, potential impacts of the pro-
posed effluent regulations ranged widely from virtually "no impact" on
the animal feeds segment to probable closure of "model" plants with
direct discharge in the wheat starch segment unless prices are increased
substantially. (About a 5 percent increase in composite wheat starch-
gluten prices was projected, and this reduces the likelihood of potential
plant closures in the wheat starch segment.)
A related and growing concern to these segments is prospective changes
in municipal treatment standards and increased costs to industrial users.
In some instances, management personnel of plants which are currently
on municipal systems are seriously evaluating pretreatment systems
and/or private treatment systems which might lower their overall treat-
ment costs. Future outlooks for these industry segments are conditioned
by prospective industry-wide treatment requirements and costs as well as
the proposed point source category requirements. Because of the pre-
dominance of municipal treatment of wastes, the price and production
effects reported in this study are difficult to quantify. That is, pass-
through of higher treatment costs to consumers via higher prices are
expected to be constrained by that portion of the industry on municipal
systems. In general, it is unlikely that plants with direct discharges
will recover full costs of pollution controls, and for some plants (especially
in wheat starch processing) plant closures and/or barriers-to-entry for
new plants with prevalent technology would be expected.
SYNOPSIS OF REPORT
The analysis of impacts and findings of the study as developed in the final
report are as briefly outlined below. This summary is presented by
major section in the same order as contained in the final report.
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I. Industry Segments
The three grain mill products industry segments analyzed were as
follows:
SIC 2043 - Cereal Breakfast Food. This segment is com-
prised of three basic types of cereal preparations: ready-
to-eat (RTE), hot cooked and natural breakfast foods. Only
the RTE subsegment required detailed analysis because the
others have no process waste waters that require treatment.
SIC 2046 - Wheat Starch Processing. Water effluents are a major
problem for this portion of the SIC 2046 industry (corn wet
milling). Improved technology in the industry will reduce
effluent problems, but existing plants are threatened by the
proposed controls. Estimated treatment costs are relatively
high for existing plants or new sources which would employ
prevalent technology.
SIC 2048 - Animal Feeds. The economic impacts of proposed
water effluent controls on this industry segment are negligible.
Process waste waters are insignificant; water use is primarily
for steam generation and cooling. Non-contact process wastes
are not subject to the proposed guidelines, and consequently
the conclusion of "no impact" was reached. No further analysis
was required in the final report.
For the reasons given, only two segments were analyzed in detail in the
report: cereal breakfast food and wheat starch processing.
A. Cereal Breakfast Food Segment
The cereal breakfast food industry in total was comprised of 26 firms
which operated 47 plants in 1974. Of this total, 17 plants were RTE
plants (three other plants were combination RTE-hot cooked cereal
plants which would also have process waste waters).
Plant sizes within the RTE subsegment range widely from under 200, 000
to over 1,000,000 pounds per day. Representative model plants of
200,000 Ibs/day, 500,000 Ibs/day and 1,200,000 Ibs/day were analyzed
in detail in the study in order to assess differential impacts by plant size.
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The firms in the cereal industry are widely diversified, principally
into other food processing activities. Leading firms in cereal manu-
facture, e.g., Kelloggs, General Foods (Post), General Mills, Quaker
Oats, are among the nation's largest companies, and their operations
are international in scope. Plants within the U.S. are located in six-
teen states, although there is some concentration of plants in the North
Central region.
The cereal breakfast food industry has been a growth industry. Em-
ployment in 1972 was estimated at 12,800, up from 12, 200 in 1967.
Value of shipments from this segment are over $1 billion per year,
and it is a leading economic segment within the grain mill products
industry. The greatest growth in production and sales in the recent
past has been with RTE and natural cereal breakfast foods. Only the
RTE subsegment has process water effluents requiring treatment,
however.
B. Wheat Starch Processing Segment
An important aspect of this industry is that two main products are manu-
factured: wheat starch and vital wheat gluten. The latter high-protein
product (constituting only 14 percent of the raw material flour input) is
an important, high valued ingredient in the baking industry and more re-
cently in the manufacture of texturized vegetable protein products. About
half of the value of sales of the industry is in the gluten products. Hence,
the industry might more accurately be called the wheat starch-gluten
industry.
This grain mill products industry segment is relatively small with only
7 plants currently operated by 6 firms. Also, 2 new plants are under
construction--but these new plants have introduced major technological
changes. Also, the two new plants were primarily constructed to manu-
facture vital wheat gluten which is in short supply. (No plans are reported
for additional construction of plants with prevalent technology.)
Wheat starch plants are typically affiliated with much larger grain null
products firms, especially flour milling companies, e.g., General Mills,
Centennial Mills, Pillsbury. (These plants utilize "second clears" and
low grade flours from flour mills as raw material input for further pro-
cessing). Plants are located predominately in wheat producing areas,
and usually near (adjacent to) flour mills. Existing plants are relatively
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old, and until recently, the numbers of plants have steadily declined.
Also, the new plants are regarded as new-types of plants and, hence,
strict comparisons are not applicable.
Existing plant sizes range narrowly from about 750 to 1, 500 hundred-
weight (cwt) of flour processed per day. A single representative model
plant with 1,000 cwt/day capacity is used in the detailed analysis to
depict this industry segment. Employment in the industry is estimated
at about 150 (excluding new plants) and value of shipments are currently
about $17 million per year. While this segment is small in comparison
to other industry segments, the products produced are important inter-
mediate products for other food processing and manufacturing industries.
Wheat starch processing requires large amounts of water for processing,
and thus water effluent regulations' are of major concern to the indudsty
even though all but one plant currently discharges into municipal systems.
Regardless of their existing treatment practices, this segment is con-
cerned about future, more stringent pollution controls.
II. Financial Profiles
Within this section of the study the primary areas of interest include
industry profitability, capital structure, cost and availability of capital,
pro forma income statements, invested capital and the cost structure of
model plants by segment. Much of the information requested by EPA
was not generally available for these industry segments. Considerable
emphasis and reliance on model plant estimates by DPRA was necessary
in order to complete this section. Such information was critical for the
impact analysis which follows in section VI, below.
A. Cereal Breakfast Food Segment
The cereal breakfast food industry has generally been a very profitable
industry in the recent past. Reported net profits of major cereal com-
panies have ranged from about 8 to 21 as a percent of net worth, with
about a 15 percent average. Net returns on sales have ranged from less
than 2 percent to over 8 percent, averaging near 4 percent. These data
represent total corporate earnings which only partially reflects cereal
plant operations. It is estimated that RTE cereal plants are relatively
more profitable than is shown in consolidated earnings reports.
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A major underlying financial characteristic of the RTE subsegment is
its capital structure. This subsegment is quite capital intensive, with
per plant investments (including working capital) ranging from about
$15 million to $75 million for the three model plants analyzed in this
study. (RTE plants are normally much larger than either hot cooked
or natural breakfast food plants.) Most of the major cereal companies
have been established for many years, and their reported fixed debt to
net worth ratios are generally low. This factor strengthens the capital
availability position of the industry if additional capital from external
sources is required.
Based on model plant pro forma income statements which were developed
for this study, the RTE model plants have estimated returns on sales
from about 11 to 13 percent. This rate of return is relatively high, and
a critical assumption in the model plant analysis is the budgeted expendi-
tures for marketing and sales costs. For example, estimated indirect
costs for these functions represented about 18 percent of sales. Major
expenditures for advertising and promotion have been a trademark of .
the cereal industry, and a characteristic of the packaged food industry
in general. An individual plant or company could vary considerably
from this budgeted level for marketing and sales in relative terms.
(A further aspect of this industry is an emphasis toward maintaining
market shares, which in turn makes market entry difficult for new
fi rm s.)
Semi-detailed cost structures for the model plants are shown in the re-
port. Due to the emphasis of this industry toward marketing and sales
programs, and its capital intensiveness (plus rather extensive ware-
housing-distribution systems), actual raw materials costs (for oats,
corn, wheat, rice, etc.) are relatively low in relation to sales, i.e.,
about 20 to 22 percent. This ratio is less than most other food pro-
cessing industries where raw materials costs are generally much
higher in relation to sales.
Due to the financial strength of the cereal breakfast food industr" the
companies in the industry are not expected to have major difficu \i
acquiring additional capital for pollution controls. The firms also have
a strong cash flow position due both to turnover in sales and to depreci-
ation allowances which are sizeable in capital intensive industries.
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B. Wheat Starch Processing Segment
The financial characteristics of wheat starch processing plants are ex-
ceptionally difficult to ascertain from consolidated financial statments
of their parent grain milling firms. In many cases, average industry
statistics for grain milling firms were used as surrogates for this seg-
ment. Also, however, engineering cost synthesis methods were used to
develop a "typical" model plant of 1,000 cwt/day. Much of the financial
data presented are derived from simulated operation of the model plant.
Historically, grain mill products firms have had net profit to sales
ratios of about 3 percent and net worth to sales ratios of about 10 per-
cent. These rates of return are generally less than the averages for
all manufacturing industries. The model plant financial data were com-
parable to these industry data, i.e., net income to sales ratio of 3.9
percent. This estimate was based on a pro forma income statement
and financial return analysis of the selected model plant.
Capital investment requirements for the wheat starch model plant were
estimated at slightly over $1 million, including working capital on a re-
placement cost basis for a prevalent technology plant. Most plants
using old technology have been in operation for some time and the finan-
cial returns shown were based on estimated book values. In this case,
the return on invested capital was about 13 percent for the plant. (For
the new plants with improved technology, capital investment require-
ments are reportedly much higher, but not known in detail. Also, oper-
ating data are not yet available, so a financial analysis could not be de-
veloped. )
On an annualized cost basis, the cost structure of the model wheat starch
plant is dominated by the cost of raw materials, i.e. , low grade flour,
which represented about 80 percent of total sales. This ratio is gener-
ally high for the grain mill products industry. Marketing and sales costs
are minimal in that sales are direct to industrial buyers both starch
and gluten products are intermediate products which are further pro-
cessed by other manufacturing industries. There is essentially no differ-
entiation of products among firms nor promotion of products in public
media.
The ability to finance new investment in the wheat starch processing in-
dustry is limited based on the financial strength of the wheat starch plant
alone. However, the affiliation of these plants with larger, diversified
firms would enhance their position for acquiring moderate levels of
additional capital if continued operations were economically feasible.
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III. Pricing
The price determination processes (demand/supply conditions) both in
the cereal breakfast food and the wheat starch processing industries
are described in this section. Each segment is quite distinct with
respect to marketing and price determination mechanisms.
A. Cereal Breakfast Food Segment
Packaged cereal breakfast foods are geared for delivery and sale pri-
marily to retail consumer markets. Consequently, these goods are pre-
pared and packed for such markets at the processing plant, regardless
of whether intermediate wholesalers, jobbers or other distributors
become involved in the marketing-distribution chain. Any marketing-
promotion programs geared to a particular product line are also norm-
ally coordinated from the processor level.
Besides the three basic types of cereal plants as identified, the industry
as a whole produces many breakfast cereal products within each sub-
segment. In many instances product forms are similar, but different!-
able, and they are marketed in varying package sizes. In the last 20
years over 150 cereal brands have been produced.
Ready-to-eat cereals, which are generally produced from one or more
of the basic grains--corn, oats, wheat and rice, maybe flaked, puffed,
extruded, or shredded. Also, these cereals may be coated or non-
coated with sprays of sugar, vitamins, minerals, etc. to fortify and/or
sweeten the product. Many new products, especially breakfast cereals
with relatively higher protein content, have recently been introduced.
In general terms, no more than 4 percent of the total crop of oats, wheat,
corn, rice or barley are used for cereal production. Hence, the in-
dustry is neither constrained by nor dominantly influences these basic
commodities markets.
A characteristic of the cereal breakfast food industry has been its aggress-
ive advertising and sales promotion programs. To promote consumer
preference for individual product brands, cereal makers on average are
reported to spend about 13 percent of their cereal sales revenue for ad-
vertising. In a related matter, Federal Trade Commission action is
currently pending against the four leading cereal companies charging
these firms with having a shared monopoly with over 90 percent of the
ready-to-eat cereal markets in the U.S. It is claimed by FTC that in-
dustry practices have resulted in artificially inflated prices, excessive
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profits, limitations on product innovation, and a general lessening of
competition. The outcome of these FTC charges could affect the future
structure of the industry.
Based on data developed for this study, it is clear only that marketing
and sales costs are generally high for all firms studied. Emphasis is
placed on market share goals which principally entails varied forms of
non-price competition. A new firm might readily establish production
capability, but market penetration would undoubtedly be difficult in this
long established market where company and brand loyalties do exist.
A natural market behavior in such an industry is to seek to maintain
company and brand loyalties with non-price forms of competition.
The proposed point source effluent controls are not expected to directly
alter prices of products. Also, any affected plants should not be dis-
located due to the proposed guidelines.
B. Wheat Starch Processing Segment
In extreme contrast with the cereal industry, wheat starch processing
involves the manufacture of essentially undifferentiated products (both
starch and gluten). Further, these products are sold principally to in-
dustrial buyers by private treaty arrangements, and there is essentially
no advertising or promotion expenditures in public media.
As a result of this market structure, there is minimal indirect expense
for marketing and sales and related administrative overhead costs. As
was depicted in the model plant financial profiles, an exceptionally high
proportion of the total costs of operation are attributed to raw materials
costs, e.g., about 80 percent of the total sales revenue. A major in-
fluence on prices is simply the cost of commodities, i.e., wheat, and
associated flour milling costs.
Also, however, starch and gluten sales are made to essentially distinct
markets. Wheat starch sales (mainly to the paper industry) compete
directly with other industrial starches (predominantly corn starch) and
little can be done by wheat starch processors to independently make
cost/price adjustments in these markets. Wheat starch suppliers are
basically "price takers" in starch markets.
Vital wheat gluten (primarily for use in baking and texturized vegetable
protein manufacture) has almost opposite market characteristics from
wheat starch. In this case, there are no close substitutes and gluten
products are in short supply in growing world markets (the U.S. im-
ports about 40 percent of its current needs, and world competition for
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available supplies has been increasing). The main opportunities for
recovering higher pollution control costs would be via gluten product
price increases. (It is also noted that the new plants are designed to
improve the production and yield of vital wheat gluten products which
will affect long-run supply response patterns of this industry.)
Although price increases are not expected directly due to the proposed
point source guidelines because of their limited applicability for existing
plants, the industry as a whole is anticipating higher waste treatment
costs regardless of their current arrangements. This expectation re-
sults in projected price increases which would apply to new sources and/
or plants which might discontinue municipal treatment services. A
composite price (revenue) increase of about five percent was projected.
IV. Economic Impact Analysis Methodology
As implied in the foregoing discussion, the primary methodology for
assessing expected economic impacts for each of the segments studied
was to develop and analyze representative model plants. That is,
financial and operating characteristics of hypothetical but representative
plants were simulated for purposes of this study.
The core analysis for this study was based upon engineering-economic
synthesis both of physical and financial characteristics of representative
(model) plants in each of tne industry segments. Where necessary,
various types of sensitivity analyses were performed to reflect potentially
relevant differences among existing plants, e.g., size, age, technology
and other physical or economic conditions. Such procedures are regularly
used in pre-investment feasibility analysis by industry; and while no single
operation is precisely simulated, this type of analysis can be used to in-
dicate approximate and relative effects of add-on pollution control treat-
ment practices. Both pre- and post-treatment analyses were performed
to determine incremental as well as aggregate economic impacts.
Industry-wide impacts were estimated based on extrapolation of n.o^jl
plant effects to all affected plants in the industry segment. Economic
information external to an individual plant was also required in order
to project industry-wide effects. Both commonly accepted microeconomic
and macroeconomic factors and procedures were utilized to interpret and
extend representative model plant results.
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The main analyses performed were designed to examine a series of
specific effects such as price, financial, production, employment,
community and balance of trade effects. Underlying procedures
used are explained in the final report and they are not repeated in detail
here. A schematic of the overall methodological steps utilized in the
impact analysis for each segment is shown in Figure IV-1 of the final
report.
One of the main impact assessments of this study involved probable
plant closures. In some cases it is not likely that a plant would make
major capital investments in an old plant if price increases sufficient
to recover such investments were not possible. The analysis developed
to assess this issue was referred to as the net present value analysis.
In brief, this analysis was used to estimate expected long-term net re-
turns if the business were continued vs. salvaging the plant and re-
investing residual funds in other activities (an opportunity cost princi-
ple). To compare these alternatives, all expected future returns were
discounted at the cost of capital rate to present values. A net present
value of less than zero in the current business would imply that plant
closure would be expected. These and other procedures are covered
in detail in the final report.
V. Pollution Control Requirements and Costs
The water pollution control standards, technology, and costs used in
this analysis were furnished by the Effluent Guidelines Division of EPA
from materials developed in part for the Agency by Sverdrup and Parcel
and Associates (S&P). The basic data constructed by S&P were adapted
to the types and sizes of plants designated in this analysis.
Three effluent guidelines were considered:
BPT - Best Practicably Control Technology Currently
Available, to be achieved by July 1, 1977
BAT - Best Available Pollution Contr 1 Technology
Economically Achievable, to be achieved by
July 1, 1983
NSPS - New Source Performance Standards, apply to
any source for which construction starts after
the publication of the proposed regulations for
the Standards
11
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Brief descriptions of the recommended technology (and estimated costs)
for achieving the three guidelines in each segment were presented in
non-technigal terms in this report. However, to avoid duplication and
possible confusion, no technical descriptions of BPT, BAT and NSPS
guidelines were given. The interested reader is referred to EPA's
technical report for technology descriptions. A'
Also included in this report are summaries of each industry's current
waste treatment practices and experiences with waste treatment con-
trols. It is known that at least some firms in the wheat starch segment
are having difficulty in meeting the proposed guidelines via transfer of
technology from other industries. In other words, the proposed tech-
nology has not yet been proven within this industry segment.
VI. Impact Analysis
The imposition of point source effluent guidelines on the ready-to-eat
cereal and the wheat starch processing industries are not expected to
result in significant direct impacts on either industry. The principal
reason for this conclusion is simply that nearly all existing plants are
on municipal treatment systems. Also, pollutants of these segments
are compatible with municipal waste treatment and the proposed Federal
regulations do not require that pretreatment be performed. To illustrate
potential impacts, however, model plant analyses were completed.
Furthermore, new sources into these segments are affected if they should
directly discharge into surface waters.
New source performance standards (NSPS) are comparable to the pro-
posed BAT guidelines and the costs for BAT control are applied to hy-
pothetical new source model plants in both industry segments. In the
wheat starch industry the proposed guidelines would result in a probable
barrier to entry for plants which would employ prevalent technology.
In the cereal breakfast food industry the proposed guidelines would not
likely prohibit entry based on comparable types of financial analysis.
A. Cereal Breakfast Food Segment
For all three sizes of RTE cereal model plants, the proposed guidelines
would lower profitability and returns on investment. Prices in the in-
dustry are not expected to be increased, however, because of the minimal
Development Document, Ibid.
12
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applicability of the point source guidelines, i.e., those plants on
municipal systems would effectively determine prices even.though any
affected plants would incur increased costs representing about a .4
percent price increase for the medium sized model plant.
While profitability and returns on investment would be lowered, any
impacted plants would not be expected to close, nor would the estim-
ated control costs prohibit entry of a new plant. The estimated treat-
ment costs are extensive, e.g., about $875,000 for a medium sized
RTE plant, but this level is not prohibitive in relation to basic capital
requirements of the RTE segment, e. g. , about $34 million for the same
model plant.
Because plant closures are not expected, and because prices are not
expected to increase due to point source guidelines, all other studied
effects are projected to be negligible. That is, production would not
be reduced, and there should be no major employment dislocations or
community impacts. In general, the RTE cereal segment is expected
to have the capacity to meet the proposed guidelines without significant
economic dislocations either on individual plants or on an industry-wide
basis.
B. Wheat Starch Processing Segment
In this industry, only one plant currently discharges directly into surface
waters, but even then only after starch wastes are first utilized in a dis-
tillery operation. (A treatment plant is under construction to treat the
distillery wastes.) Another plant is expected to discontinue discharge
into a municipal system following completion of an on-site land disposal
system. All other plants are on municipal systems.
Because of the limited applicability of the proposed guidelines of this
study, the industry-wide direct effects are expected to be minimal. On
the other hand, the proposed regulations would result in severe impacts
on any affected plant, including new sources. The impact analysis was
completed on the model plant case to illustrate the potential impacts which
could result.
Based on model plant analysis, two main potential impacts were as follows:
(1) An existing medium sized plant would require about a 9 percent com-
posite price increase (or 9 percent increase in sales revenue) in order to
recover the proposed incremental costs for pollution control, and (2)
a new source plant with prevalent technology would likely be prohibited
from entry because of both the higher replacement cost for plant facilities
and the relatively high pollution control costs as shown in this study.
13
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A further assessment was made of the potential price pass-throughs
which may be expected within the wheat starch-gluten industry. Demand
and supply prospects for starch and gluten products, especially vital
wheat gluten, are such that a 5 percent composite price (sales) increase
was projected due to likely pollution control impacts on the industry as
a whole (involving mostly plants on municipal systems).
Existing plants might then recover sufficient costs to remain operative
if private treatment systems were needed but new sources using existing
technology would still not likely enter the industry.
The foregoing impact assessments were largely hypothetical based on
model plant analysis. The purpose was to illustrate potential impacts on
either existing plants which might leave municipal treatment systems or
new source plants.
In conclusion, because of the predominance of municipal hook-ups, overall
industry impacts of point source category guidelines should be minimal.
Production, employment and balance of trade factors should not be affected
and community effects should be inconsequential. As indicated, prices of
wheat starch and gluten products are likely to be increased by about 5 per-
cnet, but primarily due to higher municipal treatment system costs. Perhs
the main direct impact is that new source plants with prevalent technology
which directly discharge would be prohibited from entry due to the extensiv
cost burden of private treatment systems as proposed.
An important further consideration in this study, however, was that im-
proved technological processes to produce vital wheat gluten have been
introduced. Such technology is expected to replace existing plant tech-
nology and, also, water emissions and control problems are greatly
reduced in new source facilities. Such facilities will likely replace
existing plants over time. In fact, two new plants with the new processes
are under consideration.
VII« Limits of the Analysis
The impact analysis presented was based upon data and information
from industry sources, from published secondary data sources and
from estimates prepared by DPRA. Subjective judgments were also
required. Naturally the analysis presented is limited to the accuracy
of the data utilized. Also, the analytical procedures employed require
simplifying assumptions which are also subject to variability within a
given industry.
14
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In this final section of the report, DPRA presented its own assessment
of the reliability or general accuracy of the data utilized, possible ranges
of errors in key data, and critical assumptions. In addition, selected
sensitivity analyses were performed to assess the relative importance
of key parameters, e.g., price levels, cost of capital, etc.
In particular, the most critical assumptions of this study involved:
representativeness of the model plants, model plant cost data, prices
and inflation, and the cost of capital. These limits were described in
Chapter VII and the reader is referred to this section of the final report
for details.
Another limit to the analysis involves the degree of applicability of the
proposed guidelines within each industry segment. A concluding sub-
section of the report is a statement regarding the current state of waste
water treatment in the industries studies.
15
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ECONOMIC ANALYSES OF PROPOSED
EFFLUENT GUIDELINES
FOR
ANIMAL FEED, BREAKFAST CEREAL AND WHEAT STARCH
SEGMENT OF THE GRAIN MILLS
POINT SOURCE CATEGORY
I. INDUSTRY SEGMENTS
The economic impacts of proposed point source effluent guidelines have
been assessed in this study for three grain mill products industry seg-
ments: (1) Cereal Breakfast Food - SIC 2043; (2) Wheat Starch Pro-
cessing - SIC 2046; and (3) Animal Feeds - SIC 2048. 1J The economic
impacts expected vary widely both among and within these three seg-
ments. The following synopsis outlines the basic impacts and explains
the general contents of this report:
SIC J043 - Cereal Breakfast Food. This segment includes three basic
types of cereal preparations: ready-to-eat (RTE), hot cooked,
and natural breakfast foods. Only the RTE subsegment has
process waste waters that require treatment. Hence, this
study focuses on the RTE subsegment of the industry.
SIC 2046 - Wheat Starch Processing. L' This industry segment repre-
sents only one part of the SIC 2046 (Wet Corn Milling) industry
as defined by Census of Manufactures. It is a relatively minor
industrial segment in SIC 2046 as well as the overall grain mill
products industry, but water effluents are a major problem.
Direct discharge treatment requirements are a serious threat
to the industry as it currently exists.
SIC represents the Standard Industrial Classification code as used
by the Census of Manufactures.
_' Only wheat starch processing operations are discussed in this report.
In a prior EPA study, the impacts on the corn wet milling segment of
SIC 2046 were assessed, i.e., Economic Analysis of Proposed Effluent
Guidelines for Selected Grain Mill Products Industries, EPA-230/
1-73-014, August 1973.
1-1
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SIC 2048 - Animal Feeds. The impacts of water effluent controls
on this industry segment are negligible because process waste
waters are virtually non-existent. Water is primarily used
for steam generation and cooling. Waste water emissions are
limited to non-contact process wastes which are not subject
to the guidelines proposed herein. Consequently, this in-
dustry segment is not studied in detail in this report due to
a "no impact" status. (Air pollution control requirements
are serious for the industry, but this study involves only
water effluent controls.)
The following analysis and presentation is developed around the two
main segments indicated (RTE cereal preparations and wheat starch
processing). Within each of these primary segments, key subseg-
ments are also described.
In the original scope of work, another four-digit SIC code was proposed
for study: SIC 2047 (Dog, Cat and Other Pet Foods). However, signi-
ficant water effluent problems were encountered in neither the "dry"
and "semi-moist" pet food segments. Canned (wet) pet foods are ex-
pected to involve water effluents of consequence, but this segment
was not a part of this study.
A description of the industry and the reasons for excluding the in-
dustry from further analysis are explained in the report: Develop-
ment Document for Proposed Effluent Limitations Guidelines and
New Source Performance Standards for the Animal Feed, Break-
fast Cereal and Wheat Starch Segment of the Grain Mills Point
Source Category, Sverdrup & Parcel and A ssociates, Inc.,
April, D74.
1-2
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A. Cereal Breakfast Food Segment
The cereal breakfast food industry includes processing plants primarily
engaged in manufacturing breakfast cereal and related preparations.
Three types of cereal plants are commonly recognized within the industry:
(1) ready-to-eat (RTE), (2) hot cooked, and (3) natural breakfast cereals.
This study focuses on the RTE subsegment, which consists of 17 plants
(plus 3 combination RTE and hot cooked cereal plants) all having sub-
stantive process waste water emissions that require treatment. The
remainder of the industry, hot cooked and natural breakfast cereal
plants, has insignificant processing waste water emissions.
j.. Types of Firms
Size and Number of Firms
The cereal breakfast food industry in total is currently comprised of
26 firms which operate 47 plants (see Table 1-1). The major firms in-
volved are among the largest food processing companies in the world,
e.g., Kelloggs, General Foods, General Mills, Quaker Oats, etc.
With the exception of a few firms, these companies generally represent
widely diversified operations, primarily in food processing; and, the
cereal breakfast foods portion of the companies' operations may not
necessarily be their dominant enterprise. For example, these com-
panies also process cake mixes, baby foods, pet foods, snack goods,
bakery goods, frozen foods as well as a wide variety of other food and
non-food items.
Cereal breakfast food plants, per se, range widely in capacity from less
than 200,000 pounds per day to well over 1,000,000 pounds per day. The
largest plants, e.g. , Kelloggs and Post, are commonly referred to as
super size plants. Plant size data are not completely available; however,
the smaller plant sizes are typically associated with the hot cooked and
the natural breakfast cereal operations. These plants would commonly
produce about 50,000 pounds per day. In contrast, RTE plants are larger
in general and range widely in size throughout the industry. For example,
in this study, representative RTE model plant sizes are depicted as pro-
ducing 200, 000 Ibs/day, 500,000 Ibs/day and 1,200,000 Ibs/day. I/
Representative plant sizes for the RTE subsegment were developed in
the Development Document, Ibid.
1-3
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Table 1-1. Breakfast cereal industry firms and plant locations, 1973
The Kellogg Co.
Battle Creek, Michigan 49016
Plants: Battle Creek, Mich.
Memphis, Tenn.
Omaha, Neb.
San Leandro, Cal.
General Foods-Post Division
Battle Creek, Michigan 49016
Plant: Battle Creek, Mich.
General Mills
Minneapolis, Minnesota 55440
Plants: Buffalo, New York
S. Chicago, HI.
Toledo, Ohio
Lodi, Calif.
W. Chicago, HI.
The Quaker Oats Company
Chicago, Illinois 60654
Plants: Cedar Rapids, Iowa
Dannville, 111.
St. Joseph, Mo.
Shiremanstown, Pa.
Nabisco, Inc.
New York, N. Y. 1002Z
Plants: Minneapolis, Minn.
Niagara Falls, N. Y.
Naperville, HI.
Oakland, Calif.
Ralston Purina Co.
St. Louis, Mo. 63188
Plants: Battle Creek, Mich.
Cincinnati, Ohio
Davenport, Iowa
International Multifoods
Minneapolis, Minn. 55402
Plants: Carrollton, Mich.
Manhattan, Kans.
Baker/Beech-Nut
Canajoharie, N. Y. 13317
Plant: Canajoharie, N. Y.
CPC International Inc.
Englewood Cliffs, N. J. 07632
Plant: Buffalo, N. Y.
Fisher Mills
Seattle, Washington 98134
Plant: Seattle, Wash.
Fruen Milling
Minneapolis, Minn. 55405
Plant: Minneapolis, Minn.
Gerber Products Company
Fremont, Mich. 49412
Plants: Ft. Smith, Ark.
Freemont, Mich.
Oakland, Calif.
Rochester, N. Y.
H. J. Heinz
Pittsburgh, Pa. 15230
Plant: Pittsburgh, Pa.
H. C. Knoke &t Company
Chicago, Illinois 60650
Plant: Chicago, HI.
Larrowe Mills
Penn Yan, N. Y. 14577
Plant: Penn Yan, N. 7.
Little Crow Milling Co.
Warsaw, Indiana 46580
Plant: Warsaw, Ind.
Malt-O-Meal Co.
Northfield, Minnesota 55057
Plants: Northfield, Minn. (2)
Stockton, Cal.
1-4
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Table I-l. Breakfast cereal industry firms and plant locations, 1973 (cont'd)
National Bakers Services. Inc.
Broadview, Illinois
Plant: Broadview, 111.
National Oats Co.
Cedar Rapids, Iowa 52402
Plant: Cedar Rapid*, Iowa
Pet, Inc.
St. Louis, Mo. 63166
Plant: , Michigan
Pillsbury Co.
S. Minneapolis, Minnesota 55402
Plant: S. Minneapolis, Minn.
Richard Foods Corporation
Melrose Park, Illinois 60160
Plant: Melrose Park, 111.
Reman Meal Co.
Tacoma, Washington 98411
Plant: Fargo, N. O.
Standard Milling Co.
Kansas City, Mo. 64105
Plant: Highspire, Pa.
Uncle Sam Breakfast
Omaha, Nebraska 68111
Plant: Omaha, Neb.
Van Brode Milling Co.
Clinton, Massachusetts 01510
Plant: Clinton, Mass.
Colgate Pa 1molive Co.
Chicago, Illinois 60654
Plant: , m.
1-5
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While detailed plant size data are not generally known, market shares
by company have been estimated. Within the cereal breakfast foods
industry, the Kellogg Company easily dominates the U.S. cereal mar-
kets (and, also, world markets). For example, Kellogg1 s market
share represents over 40 percent of the U.S. total. Market snares
of the major firms in the industry in the early 1970's were approximately
as follows:
Estimated
Market Number of
FirmShare Plants
Kellogg 43 4
General Mills 18 5
General Foods (Post) 18 1
Quaker Oats 11 4
Ralston Purina ) 3
International Multifoods ) 5 2
Nabisco ) *
All Others 5 24
Total H«> 47
Level of Integration and Diversification
The firms in the breakfast cereal industry are generally widely diversified
principally into other food processing activities. However, some compani
also have interests in many non-food items, e. g. , clothing, toys, pet food;
Furthermore, the major cereal companies are active in international
markets (both in sales and increasingly in production within other countriei
Hence, these companies are multi-national in scope. The top seven cerea
companies are all listed in Fortunes top 500 companies. Ger ml Foods
is the largest, and it is currently 39th in rank. Five additional cereal
processors are among the top 500 companies, but their cereal divisions
are relatively small compared to other types of manufacture.
Within this industry, there is substantial horizontal integration as has
been noted. Vertical integration is less apparent. Firms competitively
purchase raw materials from the agricultural sector, although some
growers may produce commodities under contract with a particular
processor.
1-6
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Major cereal companies also tend to have sophisticated processor-
wholesaler-retailer marketing relationships, although direct owner-
ship of final marketing facilities is not a significant factor. The large
cereal companies do typically maintain major warehousing-distribution
facilities centered in consuming (vs. producing) areas; and this does
influence their economic relationships with customers.
2. Types of Plants by Segment
This section includes information relative to type, size, location, age,
technology and efficiency of plants within the cereal breakfast food in-
dustry. Breakfast food plants vary in the type of breakfast cereal(s)
processed, i.e., ready-to-eat, hot cooked, and natural breakfast foods.
The known types of plants are indicated, by size category, in Table 1-2.
Both ready-to-eat (RTE) and hot cooked cereals are produced in several
plants as shown. Only the RTE plants have significant water effluents;
and, hence, the subsequent pollution control analysis is effectively
applicable to only these plants. Cereal breakfast food plants are not
always strictly cereal breakfast food operations. Most commonly,
similar items such as snack foods, cake mixes, and some pet foods may
be processed in the same plant. This variation in processing affects
overall waste treatment requirements and the impact of effluent limita-
tion guidelines.
Individual plant size data are generally not available (proprietary), but
plant locations are as indicated in Table 1-1. Also, a summary of the
number of cereal breakfast food plants by state is as follows:
State No. of Plants
Illinois 7
New York 6
Michigan 6
California 5
Minnesota 5
Pennsylvania 3
Iowa 3
Nebraska 2
Tennessee 1
Missouri 1
Kansas 1
Washington 1
Arkansas 1
Indiana 1
North Dakota 1
Massachusetts _ 1
47
1-7
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Table 1-2. Types of breakfast cereal plants by size category.
Type
Ready-to-eat (RTE)
Hot cooked
Both (RTE and hot cooked)
Natural
Unclassified
Small
7
12
1
6
Size
Category
Medium Large
8
--
2
2
V
2
1
--
--
*
Total
17
13
3
8
6
26 12 3 47
Size categories: Small--50, 000 to 300, 000 pounds/day; Medium--
300, 000 to 1, 000, 000 pounds/day; and Large (super sized)--over
1, 000, 000 pounds/day. Wide variability in size exists both among
and with the types of plants shown. The smaller plants within the
small size category are generally hot cooked or natural cereal
plants. RTE plants are usually larger in thruput volume within
each size category. In this study, representative RTE plants are
estimated as follows: small-200, 000 Ibs/day, medium - 500,000
Ibs/day, and large-1, 200 , 000 Ibs/day. This subsegment is of
primary concern in this study.
Source: Estimated by DPRA based on discussions with industry
representatives.
1-8
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There is a wide dispersion in the geographic location of cereal processing
plants. The greatest concentration of capacity is in the North Central
region, but some plants exist in all regions of the U.S. (16 states overall).
The age of plants is not generally meaningful in this industry. Buildings
may be quite old, but modern equipment and improved%technologies are
usually employed. Because of rather constant in-house replacement of
equipment and modernization as needed, the industry is considered to be
efficiently operated at the processing plant level. Expanded operations
have largely been in the "natural11 breakfast foods area, and quite
modern facilities have generally been installed.
3. Number of Plants and Employment
Plant numbers by type were as shown in Table 1-2 above. There are
no precise data available concerning employment by plant in the cereal
breakfast food industry. Manpower requirements have therefore been
estimated as follows for purposes of this analysis.
The cereal breakfast foods industry has been a growth industry in employ-
ment as well as output based on the 1972 Census of Manufactures prelimin-
ary report for SIC 2043. Estimated employment was 12,800 (all employees)
in 1972, up from 12,200 in 1967 (an increase of 5 percent). Production
workers were estimated as 10,800 in 1972, which represented 84 percent
of all employees.
DPRA estimates employment per plant approximately as follows:
All Employees
\l No. of Ave. per
Plant Size ~ Plants Plant Total
Small 32 40 1,280
Medium 12 310 3,720
Large (super size) 3_ 2,600 7,800
47 12,800
Size categories: Small50,000 to 300,000 pounds per day; Medium--
300,000 to 1,000,000 pounds per day; and Large (super-sized)--over
1,000,000 pounds per day. As noted elsewhere, the smallest plants
are typically the hot cooked and natural breakfast food types of plants,
1-9
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According to Census, 25 of the 47 plants have 20 employees or more;
or, conversely, 22 plants have less than 20 employees. Based on this
data, the "typical" small plant would not employ the average shown.
More precise data were not available, however.
4. Relationship of Segments to Total Industry
The following summary of Census of Manufactures data for the SIC 204
grain mill products industrial group provides a basis of comparison for
the industry segments in this study.
SIC Description
2041 Flour milling
2042 (See 2047 and 2048)
2043 Cereal preparations
2044 Rice milling
2045 Blended flour
2046 Wet corn milling
2047 Pet food
2048 Prepared feeds
Number of All Value of
Establishments Employees Shipments
(1000) ($ mil.)
541-' 18.0 -' 2,45lL/
4/
47 y
56 y
us y
41 y
204 y
2,087 y
12.8 -/
4.0 y
6.3 i7
12. i y
13.7 3-/
43.S3-/
i.oss y
679 -'
574 ?-/
832 y
1,359 -/
4,952 y
L/ 1967 Basis
y 1971 Basis
y 1972 Basis
I/ SIC 204 2 split in 1972 into SIC 2047 and 2048 as described.
As portrayed in this summary, cereal preparations (SIC 2043) is an important
industry segment within the 204 group both in terms of employment and value
of shipments despite the relatively small number of plants within this industry.
1-10
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As is later described in detail, not all portions of the breakfast cereals
industry have major water effluent problems. However, the summary
shown indicates that this industry is an important economic member
of the grain mill products industrial group.
5. Likely Impacted Segments
Within the cereal breakfast food industry, only one class of plants have
substantial water effluent emissions, i.e. , the RTE (ready-to-eat) cereal
plants. The hot cooked and natural cereal types of plants do not generate
significant water effluents. (Naturally, combination plants with RTE
cereals would produce effluents of concern.)
Subsequent RTE model plant cost analysis of water pollution controls is
used to establish the expected economic impacts on representative plants.
In general, cereal breakfast food operations appear quite viable and this
industry segment as a whole is economically strong. In other words, the
industry in general may be expected to withstand moderate pollution control
costs without major adverse consequences.
The smaller sized cereal breakfast food plants are the most vulnerable
plants insofar withstanding added pollution control costs. However, the
small RTE plants, e.g., 200,000 Ibs/day, are substantially larger than
either the hot cooked or natural breakfast cereal plants.
This size characterisitc of the RTE subsegment reduces the differential
impacts among RTE plants, i.e. , even "small" RTE model plants have
considerable economies of scale in production (and waste treatment costs
per unit of flow) as is later shown in Chapter VI.
B. Wheat Starch Processing Segment
The wheat starch processing industry segment includes plants primarily
engaged in manufacturing wheat starch and vital wheat gluten. This in-
dustry is currently experiencing technological shifts in processing. New
entrants into the industry utilize improved technology to better supply vital
gluten products.
1-11
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1. Types of Firms
Size and Number of Firms
The wheat starch processing industry is comparatively small; there are
only 6 firms with a total of 7 plants currently in operation. (However,
two new operations are expected to come on-stream in 1974, which will
increase gluten capacity in the industry by more than 25 perck^t. These
new plants have been designed to meet high environmental quality standards
and they will not require added environmental control modifica&pns as
generally described herein.) A listing of wheat starch industry firms
and plant locations is shown in Table 1-3.
Major wheat starch processing plants are typically affiliated with large,
diversified corporate operations with wheat starch processing being a
relatively small part of the total corporate business. Flour milling
operations are generally a main part of the total company business, and
the wheat starch processing plants utilize low grade flours g.nd £,econd-
clears from these mills. In all existing plant cases, .a wheat search
processor is closely connected with a flour milling operation as a source
of raw materials for processing.
An important aspect of wheat starch processing is that starch, per se,
is only one of two main product streams. (Wheat starch is a relatively
minor source of industrial starch compared to corn starch wh^ch is
the dominant industrial starch source in the United States.) Vital
wheat gluten is also separated in the wheat starch separation process;
and this product is a high-valued by-product stream. In .fact, it might
be considered the primary product by some, e.g. , Pills bury. Vital
wheat gluten is used in cake mixes, specialty breads, etc. to enhance
baking quality characteristics.
Level of Integration and Diversification
Wheat starch processing plants are typically affiliated and/or vertically
integrated with much larger grain milling industry firms, especially
flour milling companies. In the wheat starch industry, General Mills
and Pillsbury represent dominant diversified companies. Centennial
1-12
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Table 1-3. Wheat starch industry firms and plant locations, 1973
Centennial Mills
Spokane, Washington
Plants: Portland, Oregon
Spokane, Washington
General Mills
Minneapolis, Minnesota
Plant: Keokuk, Iowa
Midwest Solvent Co.
Atchison, Kansas
Plant: Atchison, Kansas
New Era Co.
Arkansas City, Kansas
Plant: Arkansas City, Kansas
A. E. Staley
Decatur, Illinois
Plant: Columbus, Ohio
Loma Linda
Riverside, California
Plant: Riverside, Cal.
Estimated Capacity
Cwt/day
1,000
1,000
1,000
100
750
1,500
NA
New Plants to be Operating in 1974 ;_
Pillsbury
Minneapolis, Minnesota
Plant: Minneapolis, Minn.
Far- Mar-Co.
Hutchinson, Kansas
Plant: Hutchinson, Kansas
2,000
Pilot Plant
1-13
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Mills and Far-Mar-Co are leading milling companies; and A. E. Staley
Manufacturing is a leading corn wet milling company.
Wheat starch processors or their parent companies are not generally
integrated to the wheat grower level, however. Rather, the grain
milling companies generally acquire grains for processing in corn-
modi cies markets. Some exceptions may arise in the case of new
hydro-processing plants, e.g., Pillsbury, which will utilize whole
grain wheat with high protein content. A potential exists for grower
contracts to supply the desired varieties of wheat for processing.
Wheat starch and gluten products are intermediate products which
are used in further manufacturing processes. U. S. production of
these products serves only domestic markets directly, although the
parent organizations or users of these input products may be involved
in international production and marketing. The U.S. is a net importer
of wheat starch and gluten products.
2^ Types of Plants
The sizes and locations of wheat starch plants were presented in Table
1-3 above. These plants are generally located in wheat producing areas
and essentially all plants are near (adjacent to) flour mills. Low grades
of flour and second-clears from the flour mills are the primary raw
materials used in wheat starch operations.
Most existing wheat starch plants (excluding the two new plants scheduled
for production in 1974) are relatively old plants. Wheat starch processing
technology has remained basically unchanged until recently. In its new
plant, Pillsbury will introduce major technological changes--generally
referred to as hydro processing or wet processing of wheat. In this case,
whole wheat is processed and vital wheat gluten is the primary product
(rather than wheat starch). Far-Mar-Co is also introducing major
technological changes in its' pilot plant operation, much of which is
believed similar to the Pillsbury wet processing method. Henc~ the
new operations should be regarded as new types of plants in tht ' astry.
Neither investment nor operating cost and revenue data concerning the
new plants are available. Such cost data are proprietary, and operating
data are not yet known. Pillsbury has described its new operation as a
multi-million dollar facility, and the capacity is estimated at about-twice
the typical wheat starch processing plant capacity of 1,000 cwt/day.
1-14
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3. Number of Plants and Employment
As shown in Table 1-3, the wheat starch processing industry is currently
comprised of seven plants with two new facilities expected to come on
stream in 1974. Employment data were estimated as described next.
This industry is a relatively minor segment of SIC 2046--Corn Wet
Milling; and reported Census of Manufactures data cannot be accurately
partitioned to apply to this segment only. Hence, estimates of employ-
ment were made for a representative model plant, i.e. , 1,000 cwt.
per day, based on engineering synthesis of manpower requirements.
By this procedure it was estimated that a representative plant requires
about 20 employees. Fifteen (15) or 75 percent are estimated as
production workers; and the remainder would represent general ad-
ministrative, office and sales personnel.
Total employment in the wheat starch processing industry would equal
about 140 to 150 using the estimated average of 20 employees per plant
multiplied by 7 existing plants. This estimate excludes the two new
plants scheduled for operation in 1974. These plants would increase
employment to about 200 (estimate only).
4. Relationship of Segment to Total Industry
Wheat starch processing is classified by Census of Manufactures as
a sub-segment of the corn wet milling industry (SIC 2046) and regarded
as a relatively minor economic sub-segment of this SIC group (see
Section A-4 above). Further, wheat starch processing industry statistics
are embedded within SIC 2046, wherein corn wet milling operations
eclipse wheat starch operations in employment, and in value of ship-
ments . ,
That is well over 95 percent of the employment and value of shipments
indicated is attributable to corn wet milling operations (which were
previously studied by EPA). The seven wheat starch plants represent
a total employment of only about 150 employees and value of shipments
in the order of $17 million.
While wheat starch operations appear relatively minor by comparison,
their principal products (wheat starch, and especially vital wheat gluten)
have important industrial and food processing (especially baking) appli-
cations. Furthermore, recent technological breakthroughs (e.g. hydro
processing) hold promise for potentially major growth by this industry.
1-15
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In summary, while this industry is relatively small, it is important
to overall food processing operations, and growth in the industry is
expected.
5_. Likely Impacted Segments
Wheat starch processing operations would be severely impacted pursuant
to the establishment of the proposed effluent limitation guidelines if
private treatment systems are required. This is expected based strict]-/
on the large volume-low value of end products nature of the industry.
While vital wheat gluten i? relatively more valuable than wheat starch,
this component is but a small fraction, e.g., 14 percent of the pro-
cessed input. Also, wheat starch is a generally minor industrial source
of starch in the U.S. Hence, this industry will have difficulty competing
with other starch industries, e. g. , corn starch, if pollution controls
are relatively costly.
Differential pollution control costs among plant sizes may be significant
in the wheat starch processing industry, but, most existing plants discharge
into municipal systems. This will mitigate direct impacts of the controls
proposed in this study. Also, it is unlikely that a small-scale new plant
v/ould be constructed using prevalent technology.
1-16
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II. FINANCIAL PROFILES
Financial data relating to individual operating plants, i.e. , either cereal
breakfast food or wheat starch processing, are not available. Data which
are available are published financial data for the large, publically held
companies. Since many of the companies involved are generally widely
diversified corporations, the data cannot be used to specifically reflect
the cereal (or wheat starch) divisions nor the industry segments as de-
fined in this study. However, such data, as summarized below, does
reflect the general economic viability of firms involved in these industries.
Given the limitation of having only general financial data about major
companies, model plant budgets are proposed as the best means of
achieving reasonable insight into the financial aspects of various repre-
sentative operations. Model plant configurations, matched to sizes and
product mix characteristics within these industries have been established
as indicated in Table II-1.
A. Cereal Breakfast Food Segment
1. Plants by Segment
Within this section the primary areas of interest include industry profit-
ability, capital structure, cost of capital, pro forma income statements
for model plants, invested capital for model plants and the cost structure
of model plants by segment. Much of the information requested by EPA
was not generally available for these industry segments, and considerable
reliance was placed on the model plant configurations and estimates as
s hown.
Industry Profitability
A general indication of the financial characteristics of the cereal break-
fast food industry under study is suggested in Table II-2. These selected
financial measures, i.e. , net pr;ofit as a percent of sales, net profit as a
percent of net worth, and current ratios, provide a general perspective
on operating characteristics within this industry segment.
II-1
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Table II-1. Model plant configurations by segment
Annual
operating Annual
Segment Capacity days ' production
(1,000 Ibs/day) " """(1,000 Ibs)
Cereal Breakfast Food
Small 200 234 46,800
Medium 500 240 117,000
Large 1,200 240 280,800
Wheat starch processing (1,000 cwt/day)
Medium 1,000 250 250,000
_' Estimated annual equivalent days of capacity operation, calculated As 260
times 90 percent utilization for cereal breakfast foods. Wh«at starch
processing operating days based on average days reported in the flour
milling industry.
II-2
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Table II-2. Selected financial data for breakfast cereal companies.
Companies
Kellogg
General Mills
General Foods
Quaker Oats
Ralston Purina
IntM. Multifoods
Nabisco
Kellogg
General Mills
General Foods
Quaker Oats
Ralston Purina
Int'l. Multifoods
Nabisco
1972
8.7
3.4
2.7
4.4
3.4
1.9
4.5
21.3
12.4
8.4
13.4
13.8
8.7
16.0
1971
Net Profit
8.2
3.9
8.2
3.6
3.2
1.7
4.7
Net Profit
20.8
13.2
23.6
10.5
NA
8.4
15.6
1970
as a Percent
8.1
2.7
4.9
4.7
3.6
1.7
4.6
as a Percent
20.3
NA
NA
NA
NA
NA
NA
1968
of Sales
8.9
4.4
5.8
3.9
2.9
1.5
5.4
1963
8.8
NA
NA
NA
2.7
1.6
NA
of Net Worth
20.3
NA
NA
NA
NA
NA
NA
22.6
NA
NA
NA
NA
NA
NA
Current Ratio (Current Assets to Current Liabilities)
Kellogg
General Mills
General Foods
Quaker Oats
Ralston Purina
Int'l. Multifoods
Nabisco
2.2-1
1.7-1
1.9-1
2.2-1
2. 1-1
2.0-1
2.0-1
2.0-1
1.7-1
2.0-1
2.3-1
2.2-1
1.7-1
2.3-1
2.0-1
1.9-1
2.0-1
2.0-1
1.9-1
1.7-1
2. 1-1
2.3-1
2. 1-1
2.0-1
2.3-1
2. 1-1
2.0-1
2.3-1
2.0-1
2.7-1
2.2-1
NA
2.2-1
2.3-1
2.3-1
Source: Standard & Poors Stock Reports
Securities and Exchange Commission, 10K Reports
II-3
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Attention is subsequently focused on financial characteristics of model
plants which have been developed for this study. Model plant data does
not correspond to any one operation, but such data are generally consiS'
tent with financial data which is available from both published sources
and DPRA files. The latter includes contacts with industry sources.
For example, as shown in Table II-3 below, net income after taxes
range from about 8 to 11 percent as a percent of sales for three model
cereal plants. These estimates and their derivation are discussed
further below.
Capital Structure
Capital structure ratios are similarly difficult to estimate for the RTE
industry segment involved. However, the major cereal companies have
recently had a fixed debt to net worth ratios averaging about . 2 to .6.
Total liabilities to net worth ratios averaged about . 4 - 1.2 in the
1970-73 period. Also, the current ratios (current assets to current
liabilities--see Table II-2) have averaged about 2.0, ranging from
about 1.7 to 2.3 for more than five years.
Cost of Capital
An estimated cost of financing new investment has been derived from
an analysis of the financial reports of the publicly held companies. This
method has an obvious shortcoming: the companies for the most part
are widely diversified corporations whose earnings and capital structure
reflect multi-product operations. In spite of this weakness, there are
no better available data for estimating cost of capital.
The method used to estimate the cost of capital involved a computation
of debt and equity ratios to total invested capital and the calculation of
five-year averages for dividend yield and earnings on common stock.
The estimated averages were as follows:
Cereal Industry
Ratios
Common equity/Invested capital .650
Long-term debt/Invested capital .350
Dividend yield, 5-year average .034
Earnings on common stock, .059
5-year average
II-4
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In estimating the cost of capital, other assumptions were made: long-
term interest rates average 10.0 percent, the corporate tax rate is
48 percent and the growth rate in dividends will be at least equal to
the annual inflation rate, which is estimated at 5 to 6 percent.
The cost of equities was estimated by the dividend yield method. This
is a simplification of the more complex DCF methodology. The dividend
method is:
where
k = p
g
k = cost of capital
D = dividend yield
P = stock price
g = growth
The after tax cost of debt capital was estimated from reported (annual
financial reports and financial statistics) company outlays for interest
expenses and multiplying by . 52 -- assuming a 48 percent tax rate.
These values were weighted by the respective equity to total asset and
total liabilities i' to total asset ratios.
The average cost of capital for the cereal breakfast foods industry was
estimated using the equity and debt data reported earlier as follows:
Dividend Yield plus Growth
Cereal Breakfast Foods
Equity
Debt (10.0 x 52%)
Ave. Cost of Capital
Weight Cost Growth Wt'd cost
.65
.35
.034
.052
.05-. 06
.072-. 082
.018
.09-. 10
Based on this procedure, the estimated cost of capital is from 9.0 to 10.0
percent for the cereal breakfast foods industry segment.
i' It is recognized that liabilities contain non-interest bearing liabilities,
but its weight is believed to be an adequate proxy for the weight of debt.
II-5
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Pro Forma Income Statements - Model Plants
Pro forma income statements and financial returns for selected model
plants are shown in Tables II-3 for the cereal breakfast food segment.
The model plant configurations shown are generally representative of
operating plants within this industry segment as was described in
Section I-A above.
A word of caution is that model plant estimates are based upon best avail-
able information concerning industry practices and procedures. Standard
financial ratios and cost-synthesis procedures were necessary in cases
where no better information was available. As such, model plant estimates
are useful guides, but such data should not be used literally for a given
operating plant.
In a general overview, as shown in Table II-3, cereal breakfast food plants
are capital intensive in absolute terms, but invested capital to annual sales
ratios are relatively low compared to other manufacturing industries. This
factor is especially pertinent in understanding this industry segment rela-
tive to other food processing industries.
Direct processing expenses, including raw materials (oats, wheat, corn,
etc.) are particularly low relative to sales, i.e. , approximately 47 to 51
percent as shown in Table II-3. In contrast indirect expenses are relative-
ly high (about 2Q percent) which is largely attributable to the marketing and
sales cost component. A commonly reported figure in the cereal breakfast
food industry is that 13 percent of sales is allocated to advertising and
promotion, which is probably representative of various packaged foods
industries, but high relative to other food and kindred products industries.
Annual Profits After Taxes. The medium (500,000 Ibs/day) model plant
shows a net income of about $6.2 million on sales of $58.5 million, or
10. 5 percent on sales. The small and large model plants have compa -*b\e
net income to sales percentages of about 8.0 percent and 11.0 percent,
respectively. Relatively minor scale economies are suggested in this
analysis.
Another general indication of profitability is net income after tax as a
percent of invested capital which ranges from about 16 to 20 percent for
the three cereal breakfast food model plants as shown in Table II-3.
This rate of after-tax return is regarded as relatively high compared
to the average for all industrial firms.
II-6
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Table II-3. Pro forma income statements and financial returns for
selected model cereal plants by size
Small
200,000 Ibs/day
Invested capital
Annual sales
Direct expenses
Raw materials
Labor
Packaging
Freight
Other manufacturing expenses
Subtotal
Indirect expenses
Warehousing
Marketing and sales
General and administration
Subtotal
Total operating expenses
Depreciation
Interest (long-term)
TOTAL COSTS
Net income before tax
Net income after tax
Cash flow
Net income before tax as a
percent of invested capital
Net income after tax as a
percent of invested capital
$000
15,470
23,400
5,101
725
2,621
1,942
1,427
11,816
585
4,516
2,036
7,137
18,953
700
164
19,817
3,583
1,863
2,563
--
- -
(%)
100.0
21.8
3.1
11.2
8.3
6.1
50.5
2.5
19.3
8.7
30.5
81.0
3.0
.7
84.7
15.3
8.0
11.0
23.2
12.0
Medium
500,000 Ibs/day
$000
33,500
58,500
11,993
1,521
6,201
4,739
3,276
27,730
1,346
10,998
4,622
16,966
44,696
1,596
351
46,643
11,857
6,166
7,762
--
--
(%)
100.0
20.5
2.6
10.6
8.1
5.6
47.4
2.3
18.8
7.9
29.0
76.4
2.7
.6
79.7
20.3
10.5
13.3
35.4
18.4
Large
1,200,000 Ibs/day
$000
75,500
140,400
28,782
3,510
14,461
11,232
8,003
65,988
3,510
26,956 '
9,828
40,294
106,282
3,698
702
110,682
29,718
15,453
19,151
--
--
(%)
100.0
20.5
2.5
10.3
8.0
5.7
47.0
2.5
19.2
7.0
28.7
75.7
2.6
.5
78.8
21.2
11.0
13.6
39.4
20.5
I/
Includes working capital
II-7
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Annual Cash Flow. Annual cash flows (after-tax income plus depreci-
ation) for the cereal breakfast foods industry are moderately hiqh in
relation to sales (11 to 13 percent) based on the model plant analysis
(Table II-3). Depreciation allowances as a percent of invested capital
range from 4. 5 to 4. 9 percent for the cereal model plants. These
percentage estimates are nominal in relation to all manufacturing
industries but due to the capital intensiveness of the industry, depreci-
ation allowances add substantially to the cash flow position. Cereal
plants generally have relatively long production life-expectancy,
although recurrent modernization improvements are made.
Invested Capital - Model Plants
Investment has been estimated for each of the model plants utilizing two
primary methods: replacement value method, and book value method.
Data availability constraints most affected the primary method used, but
both replacement values (1972) and book values (1972) are estimated for
all cereal model plants as shown in Table II-4. Furthermore, estimated
salvage values are also presented; and these estimates are subsequently
used in plant closure analyses.
Financial data including book values of invested capital, for the major
cereal breakfast foods companies (which are publically held) are contained
in published Securities and Exchange Commission's 10K Reports. Also,
stock reports, such as published by Standard and Poors, are available.
These data reflect principal economic relationships for these companies
as a whole.
Although neither individual plant data nor unique product data may be
determined from the above sources, it is generally possible to construct
model plant information which reflects basic underlying economic factors.
Further, in some cases, domestic and international operations are separated;
and, also, some division data (principally cereal operations, for example)
may be reported.
From such information, book value estimates of invested capital, including
working capital, depreciation, interest and other cost interrelationships
were derived for this study. As previously stated, such data should Only
be used as a guide insofar as a specific plant is concerned; and careful
use of the data should be made with reference to any single operation.
II-8
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Table II-4. Estimated replacement, book and salvage values for model
plants by segment
c <. j %, j i » *. Replacement Book Salvage
Segment and Model Plant ,_ . . ,, *
Value Value Value
($000) ($000) ($000)
Cereal Breakfast Food
200,000 Ibs/day $21,145 $15,470 $8,390
500,000 Ibs/day 46,450 33,500 17,340
1,200,000 Ibs/day 105.525 75,500 38,010
I/
- Base data available for cereal plants were book value estimates. Other
values derived from these values as explained in text.
i
II-9
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Reported book values of established firms generally understates the current
replacement value for similar facilities, e.g., due to accumulated deprecia-
tion of assets and higher current costs of construction. Thus, one should
not assume that a relatively new plant, or a proposed new plant, would
necessarily achieve the same rates of return to capital as have, been shown
in Table II-3 (which are based on book value estimates of. invested capital,
etc. ). Using replacement investment costs as shown rather than book
values, the return to capital would be reduced by about 5 percent as is
later discussed in Chapter VI.
Replacement values (and salvage values) as also shown in Table II-5, were
estimated, in this case, using book values as a starting point. The follow-
ing assumptions and procedures were involved:
% of Estimated Percentage Relationships
Total Replace. Book Salvage
Capital Cost_Itern_ ££;!l_ Value Value Value
Land 3% 100% 100% 100%
Buildings 32 150 100 ID-
Equipment 65 175 100 20
Working Capital 100 100 100
In general, land and working capital components are assumed equal in terms
of replacement, book and salvage values. Land values were subjectively
valued on a replacement cost basis and held constant. Reported book values
vary markedly among companies and not precise plant data only was avail-
able. Buildings and equipment, however, have estimated replacement costs
greater than book values; and estimated salvage values are much lower than
book values.
For the three model cereal breakfast foods plants, the following book .ues
were estimated:
Model Plant
Capital Cost Item Small Medium
($1,000)
Land $ 270 $ 600 $ 1.400
Buildings 2,800 6,400 14,900
Equipment 5,700 13,000 30,100
Working Capital 6.700 13.500 29, 100
Total Invested Capital 15,470 33,500 75,500
11-10
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Based on these estimated book values and the above replacement value
and salvage value assumptions relative to book value, the estimates in
Table II-5 were derived.
Cost Structure - Model Plants
The cost structure of the model plants, as depicted in Tables II-3 above
is reflected in part by comparing line items as a percent of sales. For
example, direct raw materials costs for cereal plants have been estim-
ated at about 20 to 22 percent of sales. Compared to other food and kindred
products processing industries, these cereal plant ratios are low. Usually
raw materials costs represent a much higher proportion of total sales in
food processing industries.
Indirect expenses, including warehousing, marketing (selling) and general
and administrative expenses are relatively high in the breakfast cereal
industry. Packaged foods, such as breakfast cereals, have traditionally
been very consumer-marketing oriented including extensive use of public
promotional programs. Hence, the low relative cost of raw materials
can be attributed partially to the high marketing-distribution cost factors
as indicated.
2. Distribution of Data
A summary of after-tax income, return of invested capital, return on sales
and estimated annual cash flows for the cereal model plants is presented
in Table II-5. These estimates reflect relatively minor production eco-
nomies of scale, in general, in the cereal breakfast foods industry seg-
ment. The larger operations tend to have higher profit rates as a percent
of invested capital, but this is less pronounced as a percent of sales.
Overall, all sizes of model plants shown appear exceptionally viable in
the economic factors indicated. The proportion of costs shown for mar-
keting and distribution are essentially constant among the model plants
based on available data. There are perhaps greater economies of scale,
in marketing-distribution vs. production, but this relationship cannot
be demonstrated with known data.
External as well as internal economic factors also condition a firm's
ability to finance new investment. The general outlook for the economy
and industry-wide prospects (independent of an individual firm) relative
to the total economy will affect capital investment financing for all firms
within an industry.
11-11
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Table II-5. Summary of after-tax net income, return on invested capital,
return on sales and cash flows of model plants by segment.
Segment and
Model Plant
Net Income (After-taxjarofit)
Total
As a % ,of
Invested
Capital
As a % of
Sales
Cash
Flows
Cereal Breakfast Foods
200,000 Ibs/day
500,000 Ibs/day
1,200,000 Ibs/day
($000)
1,863
6,166
15,453
12.0
18.4
20.5
($000)
8.0 2,563
10.5 7,762
11.0 19,151
11-12
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The general economic outlook for the next few years has been clouded
over by uncertainties surrounding economic policies and critical short-
ages of many basic resources. The lack of certainty in policies has been
intensified by political instabilities. In one direction the U.S. economy
faces the possibility of direct wage and'price controls, with or without
rationing, but with virtually certain accompaniment of shortages of
critical materials. Under these conditions, rates of economic growth,
inflation and capital spending are subject only to speculative thinking.
On the other side, the economy may undergo adjustments to present
conditions, relying largely on market pressures to cope with scarcities,
inflation and problems of growth.
3. Ability to Finance New Investment
The ability of a firm to finance new investment for pollution abatement
is a function of several critical financial and economic factors. In
general terms, new capital must come from one or more of the following
sources: (1) funds borrowed from outside sources; (2) new equity capital
through the sale of new common or preferred stock; (3) internally gener-
ated funds -- retained earnings and the stream of funds attributed to de-
preciation of fixed assets.
FOP each of the three major sources of new investment, the most critical
set of factors is the financial condition of the individual firm. For debt
financing, the firm's credit rating, earnings record over a period of
years, stability of earnings, existing debt-equity ratio and the lenders'
confidence in management will be major considerations. New equity funds
through the sale of securities will depend upon the firm's future earnings
as anticipated by investors, which in part reflect past earnings records.
The firm's record, compared to others in its own industry and to firms in
other similar industries, will be a major determinant of the ease with which
new equity capital can be acquired. In the comparisons, the investor will
probably look at the trend of earnings for the past five or so years as well
as the future environment the firm faces. Internally generated funds
depend upon the margin of profitability and the cash flow from operations.
Also, in publicly held corporations, stockholders must be willing to fore-
go dividends in order to make earnings available for reinvestment.
Heavy demands for capital funds have been expected by both public and
private organizations to compensate for resource and product shortages.
Federal, state and local regulatory actions have added to capital and re-
source demands. These factors will keep upward pressures on money
11-13
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rates. In addition, inflation will push interest rates higher as lenders
demand a larger inflation premium. The next few years, capital funds
are likely to be available, but at rates approaching the historic high
levels of 1969-70 when long-term, high grade corporate bonds yielded
9 to 10 percent. The cost of financing new investment will be high com-
pared to the 1950's and early 1960's.
Section II-A-1 contains a discussion of the profitability, capital structure
and cost of capital for the cereal segment under consideration. In sum-
mary, the cereal breakfast food industry has recorded generally high
rates of profit and the large-diversified corporate structure suggests
a strong capability for financing new investments. Both internal funds
and external sources of capital are believed generally available to this
industry segment. Also, the prospects for industry growth relative
to the total economy are good. Cereal food demands have generally in-
creased despite higher costs of production and higher prices to con-
sumers. Cereal products have partially replaced even higher cost food-
stuffs which cannot be supplied as readily or as economically as cereal
based products within the food industry as a whole.
Another important financial consideration in the breakfast cereal in-
dustry involves market share relationships as were described above.
Existing firms with established market shares could more likely obtain
financing from external sources. Marketing and sales costs within the
cereal industry are exceptionally high relative to all manufacturing
industries. A new plant might readily develop production capability,
but market penetration would probably be difficult.
B. Wheat Starch Processing Segment
The financial characteristics of the wheat starch processing segment are
discussed in this section. The reporting format is the same as that used
in Section II-A above for the cereal breakfast food segment. Many of the
procedures used for developing the financial data are the same as those
previously described, and unless otherwise stated, the procedures use '
in the cereal industry are applicable here.
Financial data for wheat starch processing operations are extremely diffi-
cult to estimate. Reported company data apply to total corporate oper-
ations of which wheat starch processing is usually a minor part. In most
cases, wheat starch plants utilize low grade flours from affiliated milling
operations. For this reason it might be said that the financial capability
11-14
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of a plant to install pollution control facilities is linked to the overall
financial condition of the parent company. However, not all plants
are financially tied to other grain milling operations, and attention
will be given to a wheat starch plant as an independent unit.'
To accomplish the objectives of this study, model plant financial char-
acteristics have been developed using engineering and economic cost
synthesis methods. Model plant data were estimated following plant
visits and other contacts with industry sources. Limited data were
available from secondary data sources.
1. Plants by Segment
The wheat starch processing industry consists of one segment only as
depicted in this analysis. Regardless of their financial linkage to other
grain mill products operations, existing wheat starch plants, per se,
are similar in their production processes. The two new plants under
construction should be treated as a second segment because of tech-
nological changes. However, operating data are not yet available for
the new plants. The proposed effluent guidelines are expected to apply
to the new plants, but the waste flow characteristics and associated
treatment requirements may differ. (The new Pillsbury plant has been
designed with regard to meeting high environmental control standards;
the Far-Mar-Co pilot plant will discharge into a municipal waste treat-
ment system during the trial operating period. No definite waste treat-
ment plans have been announced by Far-Mar-Co for full-scale pro-
duction. )
Industry Profitability
Historically, the grain mill products industry in general has had aver-
age net profit to sales ratios of about 1.8 to 3.6 percent and net profit
to net worth ratios of about 8.0 to 11.9 percent. These ratios are
generally below averages reported for all manufacturing industries.
Based on model plant analysis, the wheat starch processing segment is
estimated to have about a 3.9 percent net profit to sales ratio as shown
in Table II-6. Although this ratio is higher than the above range, it is
comparable. This estimate and its derivation are discussed further below.
11-15
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Capital Structure
Wheat starch processing operations cannot be financially segmented
from available sources, but as a broad indication, the flour milling
industry in general might be considered comparable. In this case,.
fixed debt to net worth ratios have ranged from about . 2 to .4, and
total liabilities to net worth have been from about .6 to 1.0 since the
late 1960's. Also, current ratios have ranged from about 1.8 to 2.2
since 1968 on the average.
These general indicators suggest that grain milling firms would have
moderate financial strength and capacity to expand operations without
serious detriment to underlying financial ratios. Such average in-
dicators should be used with caution, however. Individual plants may
differ significantly from such averages.
Cost of Capital
The cost of financing new investment has been estimated based on analysis
of financial reports of pub lie ally held companies in the grain milling i»>-
dustry. Such data generally represent diversified corporations whose
earnings and capital structure reflect multi-product operations, but no
better data were available.
Estimates of debt and equity ratios to total invested capital and averag*
dividend yields and earnings in the grain milling industry were as follows:
Milling Industry
Ratios
Common equity/Invested capital .670
Long-term debt/In vested capital .330
Dividend yield, 5-year average .031
Earnings on common stock, 5-year
average .072
As previously noted, other assumptions must be made to estimate an
average cost of capital, namely: long-term interest rates were estim-
ated at 10.0 percent, the corporate tax rate was 48 percent, and the
growth rate in dividends was estimated at 5 to 6 percent.
H-16
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Also, the dividend yield method for estimating the cost of equity capital
was used. That is, the following procedure was used:
* . ! * .
^ 1,1,
where k =
D =
P =
g =
cost of capital (equity portion)
dividend yield
stock price (average)
growth rate
Using the above methods and financial data estimates, the average cost
of capital for the wheat starch processing industry was derived as follows:
Dividend Yield plus Growth
. Wheat Starch Processing
Equity
Debt (10.0% x 52%)
Ave. Cost of Capital
Weight Cost Growth
.67
.33
.031
.052
.05-.06
.071-.081
.017
.088-.098
As indicated, the composite average cost of capital is estimated as ranging
from .088 to .098 for the wheat starch processing industry segment. In sub-
sequent analyses, a .09 percent rate is used as a target estimate.
Pro Forma Income Statements - Model Plant
Pro forma income statements and estimated financial returns for the wheat
starch processing model plant are as shown in Table II-6. These data re-
flect a moderate level of invested capital for a "typical" plant. In this
case, direct operating expenses are by far the dominant (86 percent of
sales) cost category; and raw materials (clears and low-grade wheat
flour--plus whole wheat in new plants) account for most of this direct
operating cost. Indirect expenses are generally low--representing only
4 to 5 percent of sales based on data available.
Annual Profits After Taxes. The model plant analysis for wheat starch
processing resulted in an estimated 3.9 percent net income (after taxes)
to sales relationship. This percentage is comparable to the average re-
turn on sales for most grain mill products industries. Also, net income
after tax as a percent of invested capital was approximately 13 percent
as shown in Table II-6. These ratios reflect moderate rates of return
in relation to all manufacturing industries.
11-17
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Table II-6. Pro forma income statement and financial return for a
selected model wheat starch plant.
Capacity
1, 000 Cwt. /day
Percent
of sales
I/
Invested capital
Annual sales
Direct
Raw materials
Labor
Heat and power
Subtotal
Indirect expenses
Total operating expenses
Depreciation
Interest (long-term)
TOTAL COSTS
Net income before tax
Net income after tax
Cash flow
Net income before tax
as a percent of invested capital
Net income after tax
as a percent of invested capital
(,$000)
770
2,590
2, 100
115
5
2,220
112
2, 332
36
27
2,395
195
101
130
2.9.7
LO.0.0
81. 1
4.4
.2
8S,. 7
4.3
90.0
1.4
1.0
92.5
7.5
3.9
5.0
25.3
13. :
Includes working capital.
11-18
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Annual Cash Flow. The wheat starch plant cash flow as a percent of
sales is estimated at about 5 percent as shown in Table II-6. Depreci-
ation allowances, which contribute to cash flow, account for about 1.4
percent of the 5 percent estimate. Depreciation allowances also repre-
sent 4.2 percent of the overall invested capital, which is nominal for
most manufacturing industries. No attempt was made to determine
optimum depreciation methods for tax purposes, rather a straight-line
depreciation schedule was used.
Invested Capital - Model Plant
Investment requirements for a prevalent technology wheat starch plant
were estimated using the replacement value method (1972 basis). Eng-
ineering cost synthesis techniques were used to establish land, site
preparation, building and equipment investment costs. Further, book
value and salvage value estimates were estimated from the "replacement
value" derived by taking into account the probable age and condition of
existing plants in the industry. These estimates are shown in Table II-7.
The invested capital replacement cost estimates for a 1,000 cwt/day
model plant were as follows:
Model Plant:
Capital Cost Item 1, OOP cwt/day
($1,000)
Land
Buildings (Incl. storage)
Equipment
Working Capital
Total Invested Capital
The estimated book and salvage values reported in Table II-7 reflect
the same relative relationships to replacement costs (by category) as
was reported above for the cereal plants. Both wheat starch and cereal
plants have been established for a long period, and, also, each industry
requires recurrent replacement and modernization of worn equipment.
Further, it is noted again that the book value estimate was used in cal-
culating model plant returns on invested capital as shown. Replace-
ment and salvage values were used in later analyses in Chapter VI .
11-19
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Table II- 7. Estimated replacement, book and salvage values for the
wheat starch model plant
Segment and Model Plant
Replacement Book Salvage
Value Value Value
Wheat Starch Processing
1, 000 cwt/day
($000)
1, 040
($000) ($000)
770
520
Base data for the representative wheat starch processing plant were
developed via engineering cost- synthesis of a model plant involving
replacement values. Hence, other values derived from this estimate^
(1972 costs) as explained in text.
11-20
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Cost Structure -Model Plant
The cost structure of the model wheat starch plant is reflected in
Table II-6 above by analyzing cost items as a percent of sales. Only
one model plant is shown, so comparisons among plants are not possible.
However, the wheat starch model plant reflects an exceptionally high
raw materials cost as a percent of sales, i.e. about 80 percent.
In contrast, the indirect expenses of the plant, including marketing
and sales costs are quite low. Wheat starch and gluten products are
intermediate goods which are inputs into other manufacturing pro-
cesses. There are no public-oriented promotional programs.and pro-
ducts are generally sold on a private treaty basis.
2. Distribution of Data ,
A summary of other financial characteristics, including after-tax in-
come, return on invested capital, return on sales, and estimated annual
cash flow for the model plant are as shown in Table II-8. These data re-
flect moderate returns bothcn sales and in relation to invested capital
for the wheat starch processing segment. Differences among plants
are not known, but the model plant is believed representative of this
industry segment as a whole.
3. Ability to Finance New Investment
A general discussion of factors affecting the firm's ability to finance
new investment was presented in section II-A-3 above. Industry-wide
and general economic outlooks as well as an individual firm's economic
prospects affect capital fund availability and money rates.
In broad terms, the wneat starch processing industry has not been re-
garded as an exceptionally profitable industry segment. The main
strength of the industry is its ties to large flour and other grain mill
products firms, e.g., General Mills, Pillsbury, Centennial Mills,
A. E. Staley, etc. Thus, via the larger parent organizations, wheat
starch plants may generally be able to finance new investments of a
moderate magnitude. Much would depend on the outlook for principal
wheat starch processing products, especially vital wheat gluten. That
is, new investments would hinge on productive output expectations in
relation to investment.
11-21
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Table II- 8. Summary of after-tax net income, return on invested capital,
return on sales and cash flows of model plants by segment.
Net Income (After-tax profit)
As a % of
Segment and Invested As a % of Cash
Model Plant Total Capital Sales Flows
($000) (%) (%) ($000)
Wheat Starca Processing
l,000cv*t/day 101 13.1 3.9 137
11-22
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Technological developments in progress, i.e., wet processing of whole
wheat, might limit capital availability for the installation of additional
prevalent technology in the wheat starch processing industry. As is
later discussed, anticipated waste water treatment requirements are
a probable deterrent to entry for any plant which may be required to
install its own treatment system.
11-23
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III. PRICING
A. Price Determination
Markets and pricing of products in the cereal breakfast foods and the
wheat starch processing industries are quite distinct. Hence, each will
be discussed separately.
Packaged cereal breakfast foods are geared for delivery and sale primarily
to retail consumer markets. Consequently, these goods are prepared and
packed for such markets at the processing plant, regardless of whether
intermediate wholesalers, jobbers or other distributors become involved
in the marketing-distribution chain. Any marketing-promotion programs
geared to a particular product line are also normally coordinated from the
processor level.
On the other hand, wheat starch processing products (wheat starch and
vital wheat gluten,principally) are produced as intermediate raw materials
which require further processing. Most "customers" are industrial buyers
such as wheat starch sales to the paper industry and gluten sales t~> the
baking industry. In general, little or no promotional efforts are involved
and primary products within the industry are generally undifferentiable
among processors.
1. Cereal Breakfast Food Segment
The total value of cereal breakfast foods shipped by all producers was
$925 million in 1972. Industry sales, including other products, were
over $1 billion. Ready-to-eat cereals are the principal products prepared,
and based on 1972 Census of Manufactures data, the following approximate
volumes and values of product were shipped:
Estimated Estimated
Type of Cereal Quantity Value
(mil. Ibs.) ($ mil. )
Ready-to-Eat
. Corn flakes & other 518.2 235.5
. Wheat flakes & other 479.7 206.6
. Oat breakfast foods 494. 0 U 168. 0 I/
. Rice breakfst foods 212.4 141.3
. Other, including baby cereals 226.5 113.0
Subtotal 1,930.8 864.4
- Estimate by DPRA.
III-l
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Estimated Estimated
Type of Cereal (cont'd) Quantity Value
Hot Cereals^
. Farina & other wheat
. Rolled oats & oatmeal 1
. Other (incl. undesignatedj
Subtotal
Total 2,235.9 924.6
- Estimate by DPRA
Implicit prices may be derived from the quantity/value data shown. For
example, the ready-to-eat cereals as a whole have an indicated value of
about $.448 per pound. However, the reader is cautioned that these
product quantities and values include interplant transfers. Hence, com*
puted values tend to understate finished product values. It is noted here
that an average value of $.50 per pound was estimated for use in the model
plant analysis, based largely on the Census data as reported.
Besides the basic product categories identified above, it is stressed that
the cereal industry produces many breakfast cereal products, .in varying
package sizes and in similar, but differentiable, product forms. Over
150 cereal brands have been produced in the last 20 years.
Ready-to-eat cereals, which are generally produced from one or more
of the basic grains corn, oats, wheat and rice, may be flaked, puffed,
extruded, or shredded. Also, these cereals may be coated or non-coated
with sprays of sugar, vitamins, minerals, etc. to fortify and/or sweeten
the product.
Natural cereals have recently been greatly expanded in production to meet
growing demandsespecially adult markets. However, this segment is
not included herein because no process waste waters are generally in-
volved in manufacture.
la general terms, no more than 4 percent of the total crop of oats, wheat,
orn, rice or barley are used for cereal production. Hence, the industry
s neither constrained by nor dominantly influences these basic commodi-
ies markets.
c.r-racteristic of the cereal breakfast food industry has been its aggress-
ivertising and sales promotion programs. To promote consumer
III-2
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preference for individual product brands, cereal makers are reported to
spend about 13% of their cereal sales revenue for advertising. Many new
products, especially breakfast cereals with relatively higher protein
content, have been introduced.
A related factor to this study is pending Federal Trade Commission
action against the four leading cereal companies, i.e. , Kellogg's,
General Mills, General Foods, and Quaker Oats. FTC charged that these
firms had a shared monopoly, with over 90 percent of the ready-to-eat
cereal markets in the U.S. FTC has alleged that numerous cereal brands,
differing only superficially in content, have been introduced in order to
maintain market shares. Further, FTC also alleged that these cereal
makers used intensive trademark promotions, restrictive allocation of
shelf space, and misleading advertising on the merits of their products.
According to FTC, it is claimed that industry practices have resulted in
artificially inflated prices, excessive profits, limitations on product
innovation, and a general lessening of competition. All of these factors
are said to be in violation of Section 5 of the Federal Trade Commission
Act.
Pending the outcome of these FTC actions, it is somewhat uncerta n how
the major cereal companies will likely respond to proposed EPA guide-
lines. The uncertainty is caused because FTC actions might include
divestiture, requiring the sale of plants and equipment to cereal competitors.
Also, actions might include the licensing of brand names and trademarks
on a royalty-free basis for a specified period of time, and/or the prohibi-
tion of future acquisitions and practices that could be construed as anti-
competitive.
DPRA met with and corresponded with the Cereal Institute trade associa-
tion in relation to this study fox EPA. The pending FTC actions were of
major concern to the industry and it was felt that a composite response
regarding pertinent cost information was not warranted under the circum-
stances. Hence, the model plant cost-synthesis approach as developed,
was taken. Further information is desirable, but cost relationships are
generally veil-documented in published records.
2. Wheat Starch Processing Segment
In extreme contrast, wheat starch processing involves manufacture of
starch and gluten from residual low-grade wheat flour ("clears" or
"second clears"). Virtually no product differentiation is made--although
different grades of starches are produced, among plants. For example,
given a specified quantity of input, the following approximate yields and
III-3
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product values are obtained:
Product/Input Percent Value /Cwt-
Flour Clears 100
Starch 70 $4-7
. Prime Pearl (28)
. Granules- (42)
Vital Gluten 14 $25-39
Fat, Fiber, Soluble Protein I/ 16
^' DPRA estimated a composite value of sales of $10.36 per hundred-
weight of flour (clears) processed.
Input for gelatinized starch (for corebinders, wallpaper paste, etc.)
and distillers' products.
\J Used as distillers' products. Value included with starch.
As noted, DPRA estimated an average value of sales of $10.36 per cwt.
of flour clears processed. Starch prices vary generally due to prices
of competing starches (primarily corn starch which comprises over 90
percent of the industrial starch used in the U.S.). Vital gluten is a highly
valued ingredient in the baking industry, both because of its generally
high protein content, but perhaps more-so for baking quality enhancement
features, e. g., improved texture and less breaking.
Because of the exceptionally high proportion of raw material costs, e.g. ,
81 percent in processing relative to sales value, this industry segment
is especially sensitive to variations in wheat and related flour costs.
Also, little can be done to compete or change prices of starch, for ex-
ample, unless changes first occur in corn starch prices. However,
vital wheat gluten prices may be changed independent of the starch prices,
subject to demand conditions in the baking industry. Other by-product
values are generally minor.
Ill-4
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B. Potential Price Changes
With the proposed imposition of pollution controls and associated treat-
ment costs, an obvious question is whether impacted firms can likely
increase prices to recover incremental waste treatment costs. In com-
petitive markets, an individual firm is not likely to raise prices unless
a high proportion of the industry is likewise impacted. (In some cases,
location advantages or other special characteristics of individual plants
or products may permit individual adjustments in prices, e. g., wheat
starch processors are widely dispersed and some location price differen-
tials may be possible.)
As is later discussed (Chapter V), very few cereal or wheat starch plants
are directly affected by the proposed point source guidelines since es-
sentially all plants are on municipal systems. Hence, industry-wide price
increases are not expected in general due specifically to the direct dis-
charge guidelines. !
In addition, attention should be given to the availability of close substitute
products which might limit price changes even if all plants in one industry
w.ere impacted. In cereal manufacturing, there appear to be few compar-
able other packaged food products which would substitute readily. How-
ever, hot cooked and natural breakfast foods within the same industry
would not be affected as much as RTE cereals by water effluent controls.
In the wheat starch industry, the two main products are produced: wheat
starch and gluten. In this case, wheat starch competes directly with
corn starch (the dominant starch used in the U.S.), and, hence, the
industry as a whole cannot freely adjust prices to compensate for higher
costs. On the other hand, vital wheat gluten products provide a rather
unique high protein foodstuff which enhances food preparation quality
(e.g., in baking and with texturized vegetable protein products). In this
case, price changes could more readily occur.
The prospective price changes that are both "needed" to recover incre-
mental pollution control costs and that are most likely within each industry
segment are discussed further in Chapter VI, below.
m-s
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IV. ECONOMIC IMPACT ANALYSIS METHODOLOGY
The economic impact analysis will utilize the basic industry information
developed in Chapters I-III plus the pollution abatement technology and
costs to be provided by Environmental Protection Agency. The impacts
to be examined include:
Price effects
Financial effects
Production effects
Employment effects
Community effects
Other effects
The required impact analysis will not be a simple sequential analysis
but rather will be composed of a number of interacting steps with feedback.
The schematic of the analytical approach is shown in Figure IV-1. Due
to the fundamental nature of potential plant shutdowns (financial and
production effects) to the other impacts, a disproportionate amount of
time will be devoted to the plant closure analysis.
The fundamental aspect of the impact analysis is similar to that lormally
done for any capital budgeting study of new investments. The problem is
one of deciding whether a commitment of time or money to a project is
worthwhile in terms of the expected benefits derived. The problem is
complicated by the fact that benefits and investments will accrue over a
period of time and that in practice the analyst is not sufficiently clair-
voyant nor physically able to reflect all of the required information,
which by definition must deal with projections of the future. In the face
of imperfect and incomplete information and time constraints, the
industry segments described in form of financial budgets of model plants.
Key non-quantifiable factors were incorporated into the analytical thought
process to interpret the quantified data. Actual financial results will
deviate from the model results and these variances will be considered
in interpreting the findings based on model plants.
A. Fundamental Methodology
The fundamentals for analysis are basic to all impacts. The core
methodology will be described here as a unit with the specific impact
IV-1
-------
Industry
Industry
Structure
Industry
Financial
Data
Segmentation
Model Plant
Parameters
V
Budget
Data
Development
\V
Model
Financial
Analyses
Industry
Pricing
Financial
Profiles
EPA Pollution
Control Costs
Base
Closures
Plant Closures L
l"**
Due to Control
Employment
Effects
Community
Effects
Price
J,
Shutdown
Analysis
J,
Production
Expected
Effects
J,
Foreign
Trade
Effects
"% -
/
» f^
7- 1. Schematic of impact analysis of effluent control guidelines.
-------
analysis discussed under the appropriate heading following this section.
The core analysis for this inquiry was based upon synthesizing physical
and financial characteristics of the various industry segments with or
representative (model) plants. Estimated financial profiles and cash
flows were presented in Chapter II. The primary factors involved in
assessing the financial and production impact of pollution control are
profitability changes, which are a function of the cost of pollution control
and the ability to pass along these costs in higher prices. In reality,
closure decisions are seldom made on a set of well defined and documented
economic rules. They include a wide range of personal values, external
forces such as the ability to obtain financing or considering the production
unit as an integrated part of a larger cost center where total costs must
be considered.
Such circumstances include but are not limited to the following factors:
I
1. A lack of knowledge on the part of the owner-opera tor
concerning the actual financial condition of the operation
due to faulty or inadequate accounting systems or
procedures. This is especially likely to occur among
small, indlependent operators who do not have effective
cost accounting systems.
2. Plant and equipment are old and fully depreciated and the
owner has no intention of replacing or modernizing them.
He continues production as long as he can cover labor and
materials costs and/or until the equipment deteriorates
to an irrepairable and inoperative condition.
3. Personal values and goals associated with business owner-
ship that override or ameliorate rational economic rules.
This complex of factors may be referred to as a value of
psychic income.
4. The plant is a part of a larger integrated entity and it
either uses raw materials being produced profitably in
another of the firm's operating units wherein an assured
market is critical or, alternatively, it supplies raw
materials to another of the firm's operations wherein
the source of supply is critical. When the profitability
of the second operation offsets the losses in the first
plant, the unprofitable operation may continue indefinitely
because the total enterprise is profitable.
IV-3
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5. The owner-operator expects that losses are temporary
and that adverse conditions will dissipate in the future.
His ability to absorb short-term losses depends upon his
access to funds, through credit or personal resources
not presently utilized in this particular operation.
6. There are very low (approaching zero) opportunity costs
for the fixed assets and for the owner-operator's
managerial skills and/or labor. As long as the operator
can meet labor and materials costs, he will continue to
operate. He may even operate with gross revenues below
variable costs until he has exhausted his working capital
and credit.
7. The value of the land on which the plant is located is
appreciating at a rate sufficient to offset short-term losses;
funds are available to meet operating needs and opportunity
costs of the owner-opera tor's managerial skills are low.
These factors are generally associated with proprietorships and closely
held enterprises rather than publicly held corporations.
While the above factors are present in and relevant to business decisions,
it is argued that common economic rules are sufficient to provide useful
and reliable insight into potential business responses to required invest-
ment and operating costs in pollution control facilities.
The following discussion presumes investment in pollution control
facilities. However, the rules presented apply to on-going operations.
In the simplest case, a plant will bie closed when variable expenses {Vcf}
are greater than revenues (R) since by closing the plant, losses can be
avoided.
A more probable situation is where VC < R but revenues are less than
variable costs plus cash overhead expenses (TCc) which are fixed in
the short run. In this situation a plant would likely continue to opera ^
as contributions are being made toward covering a portion of these
fixed cash overhead expenses. The firm cannot operate indefinitely
under this condition, but the length of this period is uncertain. Basic to
this strategy of continuing operations is the firm's expectation that
revenues will increase to cover cash outlay. Identification of plants
where TCc> R, but Vc < R leads to an estimate of plants that should be
cl' sed over some period of time if revenues do not increase. However,
* timing of such closures is difficult to predict.
IV-4
-------
The next level is where TCc < R. So long as TCc < R it is likely that
plant operations will continue so long as the capitalized value of earnings
(CV), at the firm's (industry) cost of capital, is greater than the realiz-
able-value (S) of sunk plant investment. If S >CV or CV - S < O, the firm
could realize S in cash and reinvest and be financially better off, assum-
ing reinvesting at least at the firm's (industry) cost of capital.
Computation of CV involves discounting the future earning flows to
present value through the discounting function:
NPV = £ An (Hi)"n
n=l
where
NPV = net present value
A = future after-tax income in n*h year or salvage
value in year t
i = discount rate at cost of capital
n = number of conversion periods, i. e. ,
1 year, 2 years, etc.
'It should be noted that a more common measure of profitability is
return on investment (ROI) where profits are expressed as a percent of
invested capital (book value), net worth or sales. These measures
should not be viewed so much as different estimates of profitability as
compared to present value measures but rather an entirely different
profitability concept.
The data requirements for ROI and NPV measures are derived from the
same basic financial information although the final inputs are handled
differently for each.
1. Returns
For purposes of this analysis, returns for the ROI analysis have been
defined as pre-tax and after-tax income and for the NPV analysis after-
tax cash proceeds. The computation of each is shown below;
Pre-tax income = (R-E-I-D)
After-tax income = (1 - T) x (R-E-I-D)
IV-5
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where
T = tax rate
R = revenues
E = expenses other than depreciation and interest
I = interest expense
D = depreciation charges
Interest in the cash proceeds computation is omitted since it is reflected
in the discount rate, which is the after-tax cost of capital. Depreciation
is included in the NPV measure only in terms of its tax effect and is then
added back to obtain cash flow.
A tax rate of 22 percent on the first $25,000 income and 48 percent on
amounts over $25, 000 was used throughout the analysis. Accelerated
depreciation methods, investment credits, carry forward and carry back
provisions were not used due to their complexity and special limitations.
2. Investment
Investment is normally thought of as outlays for fixed assets and working
capital. However, in evaluating closure of an on-going plant with sunk
investment, the value of that investment is its liquidation or salvage value
(opportunity cost or shadow price). \J For this analysis, sunk investment
was taken as the sum of liquidation value of fixed assets plus net working
capital (current assets less current liabilities) tied up by the plant (see
Chapter II for values). This same amount was taken as a negative
investment in the terminal year.
The rationale for using total shadow priced investment was that the cash
flows do not include interest expenses with interest charges reflecte " .n
the weighted cost of capital. This procedure requires the use of tot^x
capital (salvage value) regardless of source. An alternative would be to
use as investment, net cash realization (total less debt retirement) upon
liquidation of the plant. (In the single plant firm debt retirement would
- This should not be confused with a simple buy-sell situation which
merely involves a transfer of ownership from one firm to another.
In this instance, the opportunity cost (shadow price) of the invest-
ment may take on a different value.
IV-6
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be clearly defined. In the case of the multi-plant firm, delineation of
debt by plant would likely not be clear. Presumably this could be reflected
in proportioning total debt to the individual plant on some plant parameter
such as capacity or sales.) Under this latter procedure, interest and
debt retirement costs would be included in the cash flows.
The two procedures will yield similar results if the cost of capital and
interest charges are estimated on a similar basis. The former procedure,
total salvage value, was used as it gives reasonable answers and simpli-
fies both computation and explanation of the cash flows and salvage values.
Replacement investment for plant maintenance was taken as equal to
annual depreciation, which corresponds to operating policies of some
managements and serves as a good proxy for replacement in an on-going
business.
Investment in pollution control facilities will be from estimates provided
by EPA. Only incremental values will be used, to reflect in-place
facilities and only the value of the land for control will be taken as a
negative investment in the terminal year, i.e. , pollution control equip-
ment is assumed to have no salvage value.
The above discussion refers primarily to the NPV analysis. Investment
used in estimating ROI was taken as invested capital book value of
assets plus net working capital.
3. Cost of Capital - After Tax
Return on invested capital is a fundamental notion in U. S. business.
It provides both a measure of actual performance of a firm as well as
expected performance. In this latter case, it is also called the cost of
capital. The cost of capital is defined as the weighted average of the
cost of each type of capital employed by the firm, in general terms
equities and interest bearing liabilities. There is no methodology that
yields the precise cost of capital, but it can be approximated within
resonable bounds.
The cost of equities was estimated by the dividend yield method which is
a simplification of the more complex NPV methodology. The dividend
method is:
IV-7
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k = p- +g
where
k = cost of capital
D = dividend yield
P = stock price
g = growth
The after tax cost of debt capital was estimated from reported (annual
financial reports and financial statistics) company outlays for interest
expenses and multiplying by . 52 - - assuming a 48 percent tax rate.
These values were weighted by the respective equity to total asset and
total liabilities to total asset ratios.
Estimated cost of capital for the industries under study are contained
in Chapter II.
_4. Construction of the Cash Flow
The cash flow to be used in the analysis of BPT (Best Practical Tech-
nology) and BAT (Best Available Technology) effluent control and will be
constructed as follows:
1. Sunk investment (salvage market value of fixed assets
plus net working capital) taken in year t , assumed to
equivalent to 1976,
2. After tax cash proceeds taken for years t, to t
It is recognized that liabilities contain non-interest bearin" liabilities
but its v. eight is believed to be an adequate proxy for the weight of
debt.
IV-8
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3. Annual replacement investment, equal to annual current
depreciation taken for years t to tR.
4. Terminal value equal to sunk investment taken in year tn.
5. Incremental pollution control investment taken in year t
for 1977 standards and year t, for 1983 standards.
6. Incremental pollution expenses taken for years t. to tn
for 1977 standards and years t 1
if additive to the 1977 standards.
for 1977 standards and years t to t for 1983 standards.
7. Replacement investment taken in year t on incremental
pollution investment in BPT on assumption of life of
facilities as provided by EPA.
8. No terminal value of pollution facilities to be taken in year t .
Land value will probably be assumed to be very small and/or
zero, unless the costs provided indicate otherwise.
The length of the cash flow will depend upon the life of the pollution control
technology provided by EPA. It is anticipated that the length of fhe cash
flow will be equal to the life of control equipment specified for I1. 83
installation.
Construction of the cash flows for analyzing new source standards will be
similar to BPT and BAT, excepting plant investments, costs and returns
will be based on current values as if being built now.
B. Price Effects
As shown in Figure IV-1, price and production effects are interrelated
with each having an impact upon the other. In fact, the very basis of
price analysis is the premise that prices and supplies (production) are
functionally related variables which are simultaneously resolved, thus
the feedback loop shown in Figure IV- 1.
Solution of this requires knowledge of demand growth, price elasticities,
supply elasticities, the degree to which regional markets exist, the
degree of dominance exerted by large firms in the industry, market
concentration exhibited by both the industry's suppliers of inputs and
IV-9
-------
purchasers of outputs, organization and coordination within the industry*
relationship of domestic output with the world market, existence and
nature of complementary goods, cyclical trends in the industry, current
utilization of capacity and, exogenous influences upon price determination
(e. g., governmental regulation).
In view of the complexity and diversity of factors involved in determina-
tion of the market price, a purely quantitative approach to the problem
of price effects will not be feasible for this study. Hence, the simul-
taneous considerations suggested above will be made. The judgment
factor will be heavily employed in determining the supply response to a
price change and alternative price changes to be employed.
Application of the above NPV procedure to pollution control costs will
yield the present value of pollution control costs (i. e. , investment plus
operating cost less tax savings excluding interest expenses). Given this,
the price increase required to pay for pollution control can be calculated
as
(PVP) (100)
P = (1-T) (PVR)
where:
P = required percentage increase in price
PVP = present value of pollution control costs
PVR = present value of gross revenue (sales)
starting in the year pollution control
is imposed
T = tax rate appropriate following imposition
of pollution control
The next step would be to evaluate the required price increases again '-
expectations regarding the ability to raise prices. As pointed out above,
this v.'ill be a function of a number of factor.?. In cases where a few
large plants represent the bulk of production, their required price in-
crease will likely set the upper limit. For some products in this
study, other factors will be overriding. For example, wheat starch
IV-10
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price changes are largely constrained by competitive product, e.g.,
corn starch, price changes. Also, relative pollution control cost im-
pacts on the segments studied vs. other industries are important. From
this analysis, which will be quantitative, an initial estimate of expected
price increases would be made.
Following this, the initial shutdown analysis (production curtailment) will
be made. The decrease in production will be evaluated in light of impact
on prices and if warranted by production decreases, the expected price
increase would be revised upward.
C. Shutdown Analysis
The basic shutdown analysis would be based upon the technique described
above under Section A and the expected price increase from the preceding
step. In addition to this analysis, analyses would also be made to estab-
lish estimated plant closures without imposition of pollution control, or
so-called "base line" closures. This analysis would involve the same
financial analysis technique, without pollution control, and factoring in
other information such as trends in the industry itself and in competing
products.
Based on the results of the NPV analysis of model plants, likely closures
would be identified where NPV
-------
D. Production Effects
Potential production effects include changes of capacity utilization rates,
plant closures and stagnation of industry growth. Plant closures may be
offset in total or in part by increases in capacity utilization on the part
of plants remaining in operation. Expected new production facilities
would be estimated. The end result would be estimated production under
the conditions presumed for the above closure analysis.
The estimated production under these expectations would feedback into
the price analysis to verify or revise expected price changes.
E. Employment Effects
Given the production effects of estimated production curtailments, potential
plant closings and changes in industry growth, a major consideration arises
in the implications of these factors upon employment in the industry. The
employment effects stemming from each of these production impacts in terms
of jobs lost will be estimated using the model plant information.
Locations of closed plants with respect to their importance to locations
labor base will be evaluated. This analysis would be directed toward
re-employment potentials.
F. Community Effects
The direct impacts of job losses upon a community are immediately ap-
parent. However, in many cases, plant closures and cutbacks have a far
greater impact than just the employment loss. These multiplier effects
will be reflected in evaluating payroll losses and income multipliers.
In addition to these direct and indirect impacts on communities, broader
potential impacts must be evaluated. The criticality of the industry seg-
ments throughout the economy will be assessed.
G. Other Effects
Other impacts such as direct balance of payments effects will also be
included in the analysis. This will involve qualitative analyses.
IV-12
-------
V. POLLUTION CONTROL REQUIREMENTS AND COSTS
The water pollution control standards, technology, and costs used in
this analysis were furnished by the Effluent Guidelines Division of the
Environmental Protection Agency from materials developed in part
for the Environmental Protection Agency by Sverdrup and Parcel and
Associates (S&P). The basic data constructed by S&P were adapted
to the types and sizes of plants designated in this analysis.
Three effluent guidelines were considered:
BPT - Best Practicable Control Technology Currently
Available, to be achieved by July 1, 1977
BAT - Best Available Pollution Control Technology
Economically Achievable, to be achieved by
July 1, 1983
NSPS - New Source Performance Standards, apply to any
source for which construction starts after the pub-
lication of the proposed regulations for the Standards
A technical document describing the recommended technology for
achieving the three guidelines will be published as a separate report
by EPA. To avoid duplication and possible confusion, no technical
descriptions of BPT, BAT and NSPS guidelines are given in this report.
The interested reader is referred to EPA's technical report for tech-
nology descriptions.
A. Pollution Control Requirements
The Best Practicable Control Technology currently available (BPT) and
the Best Available Technology (BAT) tentative guidelines proposed for
cereal breakfast foods and wheat starch processing subcategories of the
grain milling industry are summarized in Tables V-l and V-2 respectively.
Also NSPS guidelines are shown in Tablve V-3 and these guidelines are
applicable for new plants which are constructed after promulgation of the
proposed standards.
Achievement of the BPT and BAT proposed guidelines would necessitate
the application of suitable treatment practices. In the draft Development
Document by S&P specific possible waste water treatment practices were
identified for each subcategory of the grain milling industry being studied
to achieve effluent reductions corresponding to both BPT and BAT levels.
V-l
-------
Table V -1. BPT pollution control: effluent reduction attainable
through the application of best practicable control technology
currently available
BPT proposed standards
BOD Suspended solids
Industry Segment (lbs/1000 Ibs.) (lbs/1000 Ibs.) pH
Ready-to-eat
cereal manufacturing 0.40 0.40 6-9
Wheat starch and
gluten manufacturing 2.0 2.0 6-9
Source: EPA and Sverdrup & Parcel and Associates
Table V-2. BAT pollution control: effluent reduction attainable
through the application of best available technology economically
achievable
BAT proposed standards
BOD Suspended solids
Industry Segment (lbs/1000 Ibs. ) {lbs/1000 Ibs. ) pH
Ready-to-eat
cereal manufacturing 0.20 0.15 ->-°
Wheat starch and
gluten manufacturing 0.50 0.40 6-9
Source: EPA and Sverdrup & Parcel and Associates
V-2
-------
Table V-3. NSPS pollution control: effluent reduction attainable
through the application of New Source > .j
Performance Standards 2.'
NSPS Proposed Standards
BOD Suspended Solids
Industry Segment (Ibs/I.OOP Ibs) (Ibs/I,OOP Ibs) pH
Ready-to-eat cereal
manufacturing 0.20 0.15 6-9
Wheat starch and gluten
manufacturing 1.00 ' 1.00 6-;9
Source: EPA and Sverdrup and Parcel and Associates
BPT and BAT technologies were applied in the impact analysis to
estimate achievement of these standards.
V-3
-------
In each case, the BAT proposed practices assumed compliance with the
BPT practices initially, followed by additional treatment to attain the
higher standard.
A brief summary of indicated treatment practices proposed to meet the
tentative guidelines by corresponding industry subcategory is presented
below.
1. Ready-to-eat Cereal Manufacturing
General Requirements - Those plants discharging directly to surface
waters must undertake major pollution abatement activities to meet
effluent limitations. Since the majority of waste waters from ready-to-
eat cereal manufacturing are generated by clean-up operations, the
influence upon raw waste characteristics through the use of in-plant
controls is not anticipated. Treatment of the entire waste water stream
will be necessary as follows:
1. Collection and equalization of flow
2. Primary sedimentation
3. Nutrient addition
4. Biological treatment using activated sludge or a comparable
system
5. Secondary sedimentation
Waste loads could be reduced in some plants if a larger degree of dry type
clean-up operations were employed, e.g., sweeping and vacuuming instead
of wet washing methods. The waste water treatment practices proposed
to meet the proposed guidelines are basically as follows:
(1) BPT: Equalization and Activated Sludge - Treatment con-
sists of an aerated equalization step with 18-hour detention
ahead of the complete-mix activated sludge system and assoc-
iated chemical feed, sedimentation, and sludge dewatexing
facilities. (Treatment alternative "B" as reported by EPA)
(II) BAT: Equalization, Activated Sludge, and Deep Bed
Filtration - Treatment consists of BPT treatment plus deep
fed filtration. (Treatment alternative "D" as reported by EPA)
Industry Experience - At present, only one cereal plant has a direct dis-
charge of process waters to surface waters, and that waste discharge is
not treated. That particular plant's municipal sewer system is being
expanded and will collect these waters for treatment in the near future.
AI\ other cereal plants studied discharge their wastes to municipal
systems.
V-4
-------
Several plants furnish minimal forms of pretreatment for process waters
prior to discharge to municipal systems* This preliminary treatment
usually consists of screening and occasionally settling and skimming.
Collected solids are either recovered and dried as animal feed or dis-
posed of by landfill.
One plant in the industry currently provides more extensive pretreatment
prior to discharge into a municipal system. This biological pretreatment
system consists of a one and one-fourth acre lagoon equipped with mechan-
ical aerators and is designed for thirty day detention. Nutrients in the
form of ammonia and phosphoric acid are added to the high carbohydrate
waste stream. All process and sanitary wastes from the plant, including
shredded cereal cooking wastes, are treated by the facility.
Another small RTE cereal plant is currently constructing a pretreatment
facility designed to treat combined process and sanitary wastes. The
facility will consist of two aerated lagoons in series with nutrient addi-
tion and provision for recycling between the two lagoons. Additional
technical data concerning these latter two plants is presented in the
S & P's Development Document for EPA.
Since RTE waste waters have been determined to be compatible with
municipal system requirements, there are no federal prerequisites for
discharge into municipal systems (although local and state laws may
require pretreatment.) However, as external waste water treatment
charges increase (primarily1 due to charges by municipalities when
existing systems are upgraded) external pretreatment facilities are
likely in order to reduce this cost burden.
i
Z. Wheat Starch and Gluten Manufacturing
General Requirements - It is doubtful that any major reductions in waste
loads can be achieved through in-plant controls or modifications at existing
starch plants. Treatment of the entire waste stream will be required as
follows to meet the effluent limitations:
1. Collection and equalization of flow
2. pH neutralization
3. Primary sedimentation
4. Biological treatment using activated sludge or a comparable
system
5. Final separation of solids by sedimentation prior to discharge
Since product yield is economically crucial to wheat starch and gluten plants,
most manufacturers already attempt to maximize solids recovery in the
starch refining operations by thickening and centrifugation. To meet the
proposed effluent guidelines, the treatment practices recommended are
as follows:
V-5
-------
(I) BPT: Equalization and Activated Sludge - Treatment includes
18 hours of aerated equalization ahead of the complete-mix sludge
system. (Treatment alternative "B" as reported by EPA.)
(II) BAT: Equalization, Activated Sludge, and Deep Water
Filtration^In this proposed system, deep water filtration is
added to the proposed BPT system above. (Treatment alternative
"D" as reported by EPA.)
Industry Experience - Of the seven wheat starch and gluten manufacturing
plants, six plants discharge their wastes to municipal systems. One of
these six plants provides pretreatment, and another is building a pre~
treatment facility. The seventh plant uses its starch effluent in a dis-
tillery operation from which there is a direct discharge to a surface
water. (This plant is constructing a treatment plant for the distillery
wastes.) Two new plants will commence operation in the near future,
and both anticipate the generation of much lower volumes of waste water
than existing plants. One plant will accomplish this by drastically re-
ducing water requirements, while the other hopes to employ a total recycle
system.
Discussions by DPRA with industry representatives have indicated a grow-
ing and widespread concern within the industry that municipal system treat-
ment charges are expected to increase sharply in the future, e.g. ,, about
a three-fold increase on average. Hence, the industry as a whole is eval-
uating both pretreatment and private treatment systems which might be
used to augment and/or replace municipal treatment systems for a lower
average treatment cost over time.
B. "Typical" Effluent Control Costs
The additional investment and operating costs required of a "typical"
in each plant-size and segment group, to achieve indicated perforiaaaace
standards were specified in the Development Document. Typical plaats,, as
defined by EPA, are indicated as follows:
In the ready-to-eat cereal segment, a wide range of plant production
capacities exists. Therefore three hypothetical plants were constructed
with the following capacities:
1. A "small" plant with a capacity of 200,000 pounds per day.
2. A "medium" plant with a capacity of 500,000 pounds per day.
3. A "large" plant with a capacity of 1,200,000 pounds per day.
V-6
-------
These three plant sizes are considered representative of the ready-to-
eat subsegment of the cereal breakfast food industry. In the small
plant capacity range, (50,000 pounds per day to 300,000 pounds per day)
those plants nearer 50,000 pounds per day capacity are typically natural
and hot cereal plants. For this reason, a plant of near the lower extreme
of the small plant capacity range was not included in this analysis.
Also , the largest plants are commonly referred to as super size plants.
Kellogg and Post plants are examples of super size operations with both
producing over 1,000,000 pounds per day (estimated production is be-
tween 1, 000,000 and 1,400,000 pounds per day).
The seven wheat starch and gluten plants demonstrate a narrow range of
plant capacities. Therefore one hypothetical plant was constructed with
the following characteristics:
1. One plant with an average daily raw material capacity of
100,000 pounds of flour.
The additional investment required by "typical" plants to achieve the in-
dicated performance standards is shown in Table V-4. The model plants
were selected as the most representative impacted size categories of
plants, and it is believed that representative plant data, as provided, are
adequate to project the overall expected impacts.
V-7
-------
Table V-3. Incremental effluent control costs for "typical"
ready-to-eat cereal, and wheat starch and gluten plants
BPT I/ BAT */
Plant size
Ready -to-eat ce
Small
(200,000
Medium
(500,000
Large
Investment
real:
527,900
Ibs/day)
811, 800
Ibs/day)
1,277, 500
Annual oper.,-.
ating costs Investment
58,000 35,400
93,700 63,500
148,100 134,200
Annual < >
ating costs
8,000
15,600
25,800
(1,200,000 Ibs/day)
Wheat starch & gluten:
Medium 964,300 126,900 31,700 7,600
(1,000 cwt/day)
Sources: Compiled by DPRA from data provided by EPA as reported in the
S fc P Developn ent Document.
L.TT and BAT controls were briefly described in the text. In botn tl.e
RTE and the wheat starch processing segments, BPT control co-.t^
refer to the ,1 Iternative "B" treatment strategy and BAT control < i. st*
refer to tlv alternative "D" treatment strategy as contained in th<_-
Development Document. BAT costs are incremental above BPT cos u
as shown.
?/ Annual operating costs include operating and maintenance costs plus
energy and power costs as shown in the Development Document. Interes'
(capital) costs and depreciation are not included.
V-8
-------
VI. IMPACT ANALYSIS
The imposition of direct discharge effluent guidelines on the ready-to-eat
cereal manufacturing and wheat starch and gluten manufacturing industries
are not likely to have significant direct impacts on either industry. The
principal reason for this is that the majority of existing firms in both
industries currently discharge waste waters into municipal sewer systems
where treatment of these wastes can be adequately performed.
With the exception of one wheat starch plant, all plants in this segment
are currently connected to municipal waste treatment facilities and are
paying associated user charges. (For the single plant with a direct dis-
charge, the starch effluent is first used in a distillery operation. Wastes
from the distillery operation are discharged to a receiving water. This
combined plant is now constructing a treatment facility for the wastes.)
However, other plants may leave municipal systems for at least two
reasons: (1) the municipal system may refuse continued service to these
plants, or (2) plant management may choose to provide their own treatment
with the anticipation of lower overall treatment costs in the long-run as
compared to prospective municipal system costs. In either case, the focus
of this analysis would indicate prospective economic impacts associated '
with installing BPT and BAT treatment systems as proposed.
As was indicated in the preceding chapter, only one cereal plant was
reported to have a direct discharge of process wastes to a receiving
water (untreated). It was further noted that the city's municipal sewer
system is being expanded to collect the wastes in the near future.
The proposed "BPT" and "BAT" standards will therefore apply to only one
plant (or soon none) in each industry. However, consideration is given to
the potential impact of New Source Performance Standards (NSPS) which
would apply to any new firms entering these industries. In this case, the
wheat starch processing industry is seriously affected.
For purposes of this study, the NSPS standards are assumed equal to the
BAT standards and the estimated costs for BAT are subsequently used for
assessing the new source potential impacts.
The ready-to-eat cereal and wheat starch manufacturing segments are
discussed separately according to the following impact types:
. Price effects
. Financial effects
. Production effects
. Employment effects
Community effects
. Balance of payment effects
-------
Because of the limited applicability of the proposed effluent guidelines,
the above effects are expected to be minimal. Attention will be devoted,
therefore, to the model plant financial analyses. In general, neither
industry as a whole will likely be adversely impacted by the proposed
standards and associated treatment requirements.
A. Cereal Breakfast Food Segment
As an overview, the following factors are pertinent to this analysis:
. Only 1 of 17 existing RTE cereal plants currently discharges
directly into surface waters.
The single plant disposing of wastes directly into surface
waters will connect with the municipal sewer system wh,ich
is in the process of expanding capacity to handle tjie con-
nection.
Plant sizes range from about 200, 000 pounds per day to well over
1,000,000 pounds per day capacity.
Four firms dominate the U.S. cereal industry with over
90 percent of the U.S. total sales of cereal products.
. Since 16 of 17 existing plants (soon all 17) discharge waste
waters into municipal systems, any expected effluent contrpl
impact will have occurred via treatment practices in place
prior to the enforcement of the proposed effluent guidelines,
1. Price Effects
Based upon the individual model plant analyses, the required price in-
creases to recover the costs of constructing and operating pollution con
trol facilities are illustrated in Table VI-1. These price changes were
calculated as a percent of sales, using a 21-year cash flow. Both treat-
ment costs and revenues were discounted back to year "zero" prior to
calculating the percentage price increase required. This increase in-
dicated the change necessary to keep the net present value (NPV) of the
plant constant. Price increases required to recover the costs of BPT
controls are relatively minor, ranging from .26 percent for the large
plant to .62 percent for the small plant. Price increases required for
the medium size plants would equal about .4 percent.
VI-2
-------
Table VI-1. Percent price increase required to pay for incremental
pollution control, cereal breakfast food industry.
BPT BAT BAT
above above above
Size of Plant Baseline Baseline BPT
(%J TOTO
Cereal breakfast food:
Small .62 .65 .03
Medium .39 .41 .02
Large .26 .28 .02
VI-3
-------
Price increases above BPT standards to recover the costs of BAT
standards are negligible, ranging from .02 percent for the large plants
to .03 percent for the small size plants.
In that only one plant is potentially impacted (and that plant will eventu-
ally discharge into a municipal system), industry prices are not ex-
pected to increase due to the imposition of direct discharge controls
on the RTE cereal industry. Competition within the industry should
overshadow any prospective price change by an individual plant.
In a related matter, however, numerous existing plants may face
higher treatment charges as municipal systems are upgraded to meet
more stringent standards. Any higher costs for municipal treatment
systems are expected to be passed on to users via higher rates and/or
surcharges. In such an instance industry-wide cereal prices might be
increased.
It is also noted that existing firms are evaluating pretreatment systems
as a means of avoiding prospective surcharges for treatment of industrial
wastes. While there is no federal requirement for installing pretreatment
systems (because cereal wastes are generally compatible with municipal'
waste treatment) some state and local regulations may necessitate pre-
treatment or make pretreatment economically feasible in the near future.
2. Financial Effects
Two primary types of analyses were completed to assess the financial
impacts of the proposed pollution control costs on the model plants: (1)
profitability impacts and (2) impacts on the present value of future net
income stream.
Profitability impacts include the following:
Pre-tax net income
After-tax return on sales
. Pre-tax rate of return on invested capital
After-tax rate of return on invested capital
Annual cash flow
VI-4
-------
Basic industry information and model plant financial profiles of the
RTE cereal subsegment, as presented in Chapter II, provide the
basis for assessing these profitability impacts.
Pre-tax income
The impact of alternative effluent treatment level on pre-tax net income
for model cereal plants is illustrated in Table VI-2. The reduction in
pre-tax net income due to the imposition of BPT and BAT standards
ranges from 1.0 percent in the large plant to a 3. 3 percent reduction
in the small cereal plant. After-tax income reductions are comparable,
ranging from about .9 percent to 2.9 percent for the same plants.
Return on sales
The after-tax return on sales for model cereal plants is illustrated in
Table VI-3. With the imposition of BPT and BAT standards, it can be
seen that the reduction in after-tax return on sales ranges from 0. 1
percent in the large plant to 0.3 percent in the small. Incomes as a
percent of sales for all three plant sizes are negligibly reduced with the
imposition of these standards.
Return on invested capital
Return on invested capital before and after tax for model cereal plants
is illustrated in Table VI-4. The high after-tax rate of return on invested
capital demonstrates exceptional profitability of the cereal breakfast food
industry. After tax income as a percent of invested capital ranges from
a high of 20. 5 percent in the large size plant to a low of 12.0 percent for
the small size plant.
With the imposition of the BPT and BAT Standards after-tax return on
invested capital declines 0.7 percent in the small plant and 0.6 percent
in the large plant. Again this is not a decline that would be damaging.
Cash flow
Estimated cash flows (after-tax income plus depreciation) for the model
cereal plants are illustrated in Table VI-5. Cash flows, at baseline,
range from 16.6 percent of average invested capital for the small plant
to 25.4 percent for the large plant. Cash flows are not adversely affected,
after the imposition of the BPT and BAT standards.
VI-5
-------
Table VI-2. Pre-tax and after-tax income for model cereal plants, assuming no price change
Size of Plant
Cereal breakfast food:
Small
Medium
Large
Pre-tax Income
Baseline
($000)
3, 583
11, 857
29,718
BPT
($000)
3,478
11,690
29,455
BAT
($000)
3,466
11,669
29,417
After-tax Income
Baseline
($000)
1, 863
6, 166
15,453
BPT
($000)
1,815
6,085
15,323
BAT
($660)
1,809
6,074
15,303
I
a-
-------
Table VI-3. Pre-tax and after-tax return on sales for model cereal plants, assuming no price change
<
-J
Size of Plant
Cereal breakfast food:
Small
Medium
Large
Baseline
(%)
15.3
20. 3
21.2
Pre-tax Income
BPT
(%)
14.9
20.0
21.0
BAT
(%)
14.8
19-9
21.0
After-tax Income
Baseline BPT
(%)
8.0
10. 5
11.0
(%)
7.8
10.4
10.9
BAT
(%)
7.7
10.4
10.9
-------
oo
Table VI~4. pre-tax and after-tax rate of return as a percent of average invested capital for model
cereal plants, assuming no price change.
Size of Plant
Cereal breakfast food:
Small
Medium
Large
Baseline
(%)
23.2
35.4
39.4
Pre-tax
BPT
(%)
21.7
34.1
38.4
Inc ome
BAT
(%)
21.6
33.9
38.2
After-tax Income
Baseline BPT
<%) (*)
12.0 11.3
18.4 17.7
20.5 20.0
BAT
(%)
11.3
17.7
19.9
-------
Table VI-5. Estimated cash flow on average invested capital for model cereal
plants, alternative effluent treatment levels assuming no price change.
Type fc Size of Plant Baseline BPT BAT
Cereal breakfast food:
Small 2.563 16.6 2.541 16.4 2.537 16.4
Medium 7.762 23.2 7,722 23.1 7,714 23.0
Large 19.151 25.4 19,085 25.3 19,072 25.3
VI-9
-------
Net present value (NPV)
Another measure of financial viability of a plant is the net present value
(NPV) of projected streams of cost and revenues. Using this analysis,
it is possible to assess the likelihood of continued plant operation versus
plant closure. In discounting the cash flow using a discount rate equivalent
to the firms cost of capital, positive NPV's would indicate the likelihood
of continued plant operation whereas negative NPV's would infer a probable
plant closure. To complete this analysis, the following assumptions were
made.
1. The existing plants have sunk investments but they could b«
disposed of today for a salvage value and reinvested elsewhere
if their cereal function were discontinued. However, only 10
percent of the estimated replacement cost is assumed recoverable
for this industry. This relatively low value is estimated because
cereal plants are moderately capital intensive and equipment
would have little salvage value in alternative uses outside the
industry.
2. Revenues and expenses are assumed to remain constant
over time, i.e. , 20 years of operation.
3. The estimated cost of capital for the industry is 9,0 percent.
The net present value of model cereal plants before aztd after
the imposition of alternative effluent treatment standards are
shown in Table VI-6.
Since NPV's of all examined plants are positive, the above analysis indi-
cates that all respective plants are expected to be capable of bearing the
cost of both BPT and BAT controls. No plant closures, due to the cost of
pollution abatement, were suggested by this model plant analysts.
The fact that sixteen of seventeen existing plants discharge waste waters
to municipal systems is a direct indication that no plants are likely to
shutdown due to pollution control requirements, per se.
VI-10
-------
Table VI-6. Net present values of model cereal plants before and after the imposition of alternative
effluent treatment standards.
BPT
Size
of
Plant
Small
Medium
Large
NPV of
Plant Before
Controls
($000)
13,080
48,613
124,469
NPV of
BPT
Controls
($000)
- 687
-1,078
-1,700
NPV of
Plant After
Controls
($000)
12,393
47,535
122,769
NPV of
BAT
Controls
($000)
- 36
- 68
-127
BAT
NPV of
Plant After
Controls
($000)
12,357
47,467
122,642
-------
3. NSPS Effects
Another effect of environmental controls on the cereal industry in the
increased cost burden for new plants in the industry and potentially
lower industry growth through time. NSPS, new source performance
standards, if applicable, would be a partial deterrent to entry.
To assess probable impacts on a new plant, replacement investment
costs (versus book value investment costs) are used to perform similar
profitability analyses as shown above. New plants entering the industry
are expected to realize a lower after-tax rate of return on invested
capital (ROI). Also, lower net present values (NPV) are expected.
Comparative ROI and NPV data for the tnree RTE model plants as shown
in Table VI-7 illustrate these effects. The new source model plants
remain economically viable following the imposition of BAT control
standards.
4. Other Effects
The remaining types of impacts--production effects, employment effects.,
community effects and balance-of-payment effects -- are considered
insignificant due to the nature of this industry. Sixteen of the seventeen
existing plants, as reported in the Development Document L' are
not affected directly by the guidelines of this study, although it should be
noted that these plants may incur an increase in the cost of operation
due to increased surcharges from their respective municipal plants.
B. Wheat Starch Processing Segment
As background for assessing the expected economic impacts of water
pollution controls on this industry, the following factors are highlighted:
Development Document for Proposed Effluent Limitations Guidelines and
New Source Performance Standards for the Animal Feed, Breakfast Cereal ,
and Wheat Starch, prepared by Sverdrup & Parcel and Associates, Inc. for
United States Environmental Protection Agency, April, 1974.
VI-12
-------
Table VI-7. Existing plants vs. new source plants with BAT controls,
returns on invested capital (ROI) and net present values
(NPV), assuming no price increases.
Plant Size
Existing Plants
ROI NPV
(%) ($000)
New Plants
ROI NPV
(%) ($000)
Small
Medium
Large
12.0 13,080
18.4 48,613
20.5 124,469
8.3
12.8
14.2
1,877
23,550
67,172
VI-13
-------
Of the seven wheat starch gluten manufacturing plants,
six plants currently discharge their wastes to municipal
systems.
Wheat starch plants connected to municipal systems expect
to be faced with significant treatment cost increases as
municipalities upgrade their systems.
The seventh plant uses its starch effluent in a distillery
operation from which there is a direct discharge to a
surface water. Some question exists as to whether this plant
falls under the guidelines proposed for wheat starch processors
or under those for a distillery operation (it is also in the pro-
cess of building a treatment plant for the distillery wastes).
The seven existing plants exhibit a fairly narrow range of
plant capacities (50,000 Ibs to 150,000 Ibs) of flour pro-
cessed per day and have similar waste water character-
istics. Our "typical" model plant has an average daily raw
material capacity of 100,000 Ibs of flour.
Major wheat starch processing firms typically have large,
diversified operations, and wheat starch processing is a
relatively small part of the total corporate business.
Little can be done to increase prices of wheat starch unless
changes first occur in corn starch prices (corn starch com-
prises over 90 percent of the U.S. starch usage).
With six of seven existing wheat starch plants currently discharging
waste waters into municipal systems, the existing industry as a whole
should not be directly affected adversely by the proposed point-source
effluent guidelines. The impact issue is clouded over, however, be-
cause the proposed guidelines and associated costs would cause severe
impacts on new sources and/or any plant which might economically pre-
fer to discontinue its municipal hook-up.
The latter alternative has been under consideration by plant managers
in the industry because of higher projected municipal treatment charges,
although private treatment costs as estimated in this report appear pro-
hibitive for existing plants. As noted elsewhere, technological improve-
ments in wheat starch-gluten processing increase the risks of added
VI-14
-------
capital expenditures within existing plants due to potential rapid obso-
lescence of prevalent technology. Another related concern of industry
representatives is that the proposed treatment technologies have not
yet been demonstrated within the industry. This adds to the overall
uncertainty with which the industry is faced. In essence, the industry
is relatively more concerned with the proposed point-source guide-
lines than would at first appear warranted, -i'
1. Price Effects
Based on the individual model plant analysis, the required price in-
crease to recover the costs of incremental pollution facilities is illus-
trated in Table VI-8. Price changes were calculated using a 21-year
cash flow with treatment costs and revenues being discounted back to
year "zero" prior to calculating the percentage price increase required.
This increase indicates the change necessary to maintain a constant
plant net present value (NPV).
The price increase required to achieve BPT standards, according to the
model plant analysis, is approximately 8.7 percent for the medium size
model plant. An additional incremental price increase of 0.2 percent is
required for subsequent implementation of the BAT standards.
An individual plant in the wheat starch processing industry would not
be expected to pass-through cost increases of the magnitude indicated,
i. e., about 9 percent. However, with essentially all plants anticipating
higher waste treatment charges, some price increases are likely. The
impacts of 1, 3 and 5 percent price increases are evaluated in the financial
and NPV sections below to indicate how price increases might alter a
firm's decision to continue operation. Also, it is proposed that a price
increase of about 5 percent would be possible under anticipated prospects
throughout the industry.
t
The prospective 5 percent average price increase is based on both supply
and demand factors. On the cost of production (supply) side, it is expected
that a three-fold increase in municipal waste treatment charges (from a
base level of about $30,000 to $40,000 average for a medium plant size)
will occur. This corresponds to a 3 to 4 percent increase in average sales
prices to recover these added costs. Hence, industry price increases of this
magnitude appear warranted due to the water pollution control costs in general.
- One plant representative has reported that a land disposal system is
under construction-and his plant will soon discontinue its municipal
treatment service. Since the proposed guidelines have not been
promulgated, there is still uncertainty about the adequacy of this
development and/or any requisite changes.
VI-15
-------
Table VI-8. Percent price increase required to pay for incremental
pollution control, wheat starch processing industry.
BPT BAT BAT
Size of Plant Above Baseline Above Baseline Above BPT
Medium 8.7 8.9 .2
VI-16
-------
On the demand side, two major market demand questions arise (which
ultimately favor a further price increase as explained). First, wheat
starch sales compete directly with corn starch products. Since corn
starch comprises over ninety percent of all industrial starch sales in
the U.S., wheat starch prices cannot necessarily be raised "as needed."
Corn starch supplies (relative to demand) will essentially determine
industrial starch prices (including wheat starch). In this respect, only
about a 1 to 2 percent increase in starch prices may result from increased
water treatment cost pass-throughs. _'
Secondly, vital wheat gluten market prices might be increased to recover
some or all of the anticipated higher waste treatment costs. In this case,
there is a good market potential for recovering costs. Approximately half
of the value of sales from the wheat starch processing industry is derived
from vital wheat gluten products. The demand for gluten has been growing
rapidly (not only in the baking industry but also in the manufacture of
texturized vegetable proteins). Also, the U.S. has recently imported
about 40 percent of the U.S. demand for gluten with steadily increasing
competition for available world supplies. Further, the demand for vital
wheat gluten is regarded as price inelastic (no quantitative estimates of
price elasticity are known, however); and, thus, these factors are favorable
from the wheat starch processing industry's viewpoint.
While no definitive projection of average potential price increases can
be made at this time, the above factors suggest that a significant com-
posite price change may be possible. For example, an 8 to 10 percent
increase in gluten prices plus a 1 to 2 percent change in starch prices
could result in a composite increase in sales of about 5 percnet. Hence
a 3 to 5 percent overall price increase appears likely throughout the
industry based both on supply and demand factors. Because of potential
supply shortages of gluten products for some time into the future, a 5
percent target increase is proposed for this analysis.
2. Financial Effects
Two primary types of analyses were completed to assess the financial
impacts of the proposed pollution control costs on the wheat starch model
plant: (1) profitability impacts and (2) impacts on the present value of
future net income streams.
I/
A prior EPA study of the Corn Wet Milling industry indicated that
corn starch price increases of this magnitude were expected due to
water effluent controls.
2/
In contrast, the new wet processing methods are principally designed
to produce wheat gluten. Over time adequate supplies of gluten may be
more competitively produced in such plants.
VI-17
-------
Profitability impacts include the following:
. Pre-tax and after-tax
. After-tax return on sales
. Pre-tax and after-tax return on invested capital
. Annual cash flow
The two types of analyses were completed assuming no price increase
and with projected 1, 3 and 5 percent increases. L' The 1 and 3 percent
price increase was examined to illustrate the sensitivity of price (revenue)
increases. Expected impacts with a 5 percent price increase would result
in marginal plant operations for plants directly discharging. Without such
a price increase model plants would be expected to close if the proposed
BPT and BAT treatment systems were required.
Pre-tax and after-tax income
The impact of alternative effluent treatment levels on pre-tax net income
for the model wheat starch processing plant is illustrated in Table VI-9.
The imposition of BPT standards, assuming no price increase, severely
reduces net income from $195, 000 to -$18,700. The imposition of BAT
standards further reduces pre-tax income to -$29, 100. As further shown
in Table VI-9. price increases of either 3 percent or 5 percent would re-
sult in positive pre-tax and after-tax incomes. A 1 percent average price
(revenue) increase would lower losses, but not produce a positive net
inc om e.
Return on sales
The after-tax return on sales for the model wheat starch plant, for al-
ternative treatment levels, is illustrated in Table VI-10. The returns
follow the same general pattern as that established in the pre-tax income
situation. Profits are reduced by more than 100 percent with the impo-
sition of BAT and BPT standards. After-tax return on sales decline
from 3. 9 percent at baseline to -1.1 percent after the implementation
of BPT and BAT standards with no price changes. Again, both 3 and 5
percent price increases would yield a small positive return on sales as
is also shown in Table VI-10.
The 5 percent composite average price increase is projected. Other
composite price (sales) increases are shown to indicate sensitivity of
impacts due to price factors.
VI-18
-------
Table VI-9. Pre-tax and after-tax income for model wheat starch
processing plant, with selected price changes
Size of Price . Pre-tax Income
Plant Increase Baseline
/ O/ \
After -tax Income
BPT BAT Baseline
BPT BAT
Medium 0. 0
Medium 1. 0
Medium 3. 0
Medium 5. 0
195.0
221.0
272.7
324.5
-18.7 -29.1
7.3 -3.1
59.0 48.6
110.8 100.4
101.0
120.7
148.3
175.2
-18.7 -29.
5.7 -3.
37.2 31.
64.1 58.
1
1
8
7
Alternative price increases (assumed) reflect an average composite
increase in both starch and gluten products such that sales revenue
is increased by the percentage shown. Three levels are shown to
indicate sensitivity of results to price changes.
VI- 19
-------
Table VI-10. Pre-tax and after-tax return on sales for model
wheat starch plant, with selected price changes
Size of Price
Plant Increase _'
Medium 0. 0
Medium 1 . 0
Medium 3. 0
Medium 5. 0
Pre-tax Income After -tax Income
Baseline BPT BAT Baseline BPT BAT
__..__.._____ _/%\ _ ..______._
7.5 -0.7 -1.1 3.9 -0.7 -1.1
8.4 0.3 -0.1 4.6 0.2 -0.1
10.2 2.2 1.8 5.6 1.4 1.2
11.9 4.1 3.7 6.4 2.4 2.2
Alternative price increases (assumed) reflect an average composite
increase in both starch and gluten products such that sales revenue
is increased by the percentage shown. Three levels are shown to
indicate sensitivity of results to price changes.
VI-20
-------
Pre-tax and after-tax return on invested capital
Return on invested capital before and after taxes for the model wheat
starch processing plant is illustrated in Table VI-11. After-tax income
as a percent of invested capital is 13. 1 percent. With the imposition of
the BPT and BAT standards, after-tax return on invested capital de-
clines from 13.1 percent to an estimated -1.7 percent. Expected re-
turns on invested capital follow a similar pattern as the return on sales.
Returns on invested capital after price increases are also illustrated
in Table VI-11. In general, none of the price assumptions shown would
return the plant to the same profit level as indicated for the baseline case
without a price change.
Cash flow
Estimated cash flow (after-tax income plus depreciation) for the model
wheat starch plant is illustrated in Table VI-12. Cash flow, at baseline,
is 17..8 percent. The estimated cash flow is adversely affected after the
imposition of the BPT and BAT standards. A 5% price increase returns
estimated cash flow to a level only slightly higher than attainable at base-
line with no price increase.
Net present value (NPV)
Another measure of financial viability of a plant is the net present value
(NPV) of projected streams of cost and revenues. Using this analysis,
it is possible to assess the likelihood of continued plant operation versus
plant closure. In discounting the cash flow using a discount rate equivalent
to the firms cost of capital, positive NPV's would indicate the likelihood
of continued plant operation whereas negative NPV's would infer a probable
plant closure. To complete this analysis, the following assumptions were
made:
1. The existing plants have sunk investments but they could be
disposed of today for a salvage value and reinvested else-
where if their wheat starch processing function were dis-
continued. However, only 10 percent of the estimated
replacement cost is assumed recoverable for this industry.
The relatively low value is estimated because wheat starch
processing plants are moderately capital intensive and equip-
ment would have little salvage value in alternative uses out-
side the industry. Also, most existing wheat starch plants
are relatively old.
2. Revenues and expenses are assumed to remain constant
overtime, i.e., 20 years of operation.
VI-21
-------
Table VI- 11. Pre-tax and after-tax rate of return as a percent of average
invested capital for model wheat starch processing plants,
with selected price changes.
Size of Price
Plant Increase
Medium 0.0
Medium 1 . 0
Medium 3. 0
Medium 5. 0
, Pre-tax Income After -tax Income
Baseline BPT BAT Baseline BPT BAT
. . /%\ _-__«_
25.3 -1.1 -1.7 13.1 -1.1 -1.7
28.7 0.4 -0.2 15.7 0.3 -0.2
35.4 3.4 2.7 19.3 2.1 1.8
42.1 6.4 5.7 22.8 3.7 3.3
Alternative price increases (assumed) reflect an average composite
increase in both starch and gluten products such that sales revenue
is increased by the percentage shown. Three levels are shown to
indicate sensitivity of results to price changes.
VI-22
-------
Table VI-12. Estimated cash flow on average invested capital for
model wheat processing plant, alternative effluent
treatment levels, assuming no price change.
Size of Plant Baseline BPT BAT
($000) (%) ($000) (%) ($000)
Medium 137 17.8 65 8.5 56 7.4
VI-23
-------
3. The estimated average cost of capital for the industry is
9.0 percent. The net present value of model wheat starch
plants, before and after the imposition of alternative
effluent treatment standards, is illustrated in Table VI-13.
The imposition of BPT and BAT controls reduces the net present value
of the model wheat starch to a negative position in all cases below the
5% price increase case. This suggests that this size of plant would
not be able to bear the cost of BPT and BAT controls and would prob-
ably shut down unless prices increased by about 5 percent. Variations
from the model plant case are obviously expected iu actuality, but the
analysis illustrates the general level of impacts and the sensitivity of
price (cost) pass throughs which could affect a plant closure decision.
3. NSP5 Effects -
New source performance standards (NSPS) equal to BPT and BAT stand-
ards as presented above, would apply to any new plant which had a point-
source discharge. To assess probable impacts on such a plant, analysis
is first made of the model plant as described above--but with replace-
ment investment costs vs. book value investment levels as was applied
to an existing model plant.
In brief, a new plant (using prevalent technology) would incur even
greater losses than an existing plant because of its higher average in-
vestment levels unless prices were significantly increased. The main
analytical question involves an NPV analysis, i.e., would the NPV of a
new source be equal to or greater than zero? As shown in Table VI-14,
the answer is clearly no, assuming no price increases.
Other related questions are whether a new source would likely be con-
structed with increased prices; and if so, at what increased level?
Further NPV analysis, as is also summarized in Table VI-14, suggests
that a new source would not be economically viable even at the 5 percent
price increase level. Extrapolation of the data shown indicates that
about an 8 percent price increase would be required to attract new plants
(using existing, prevalent technology) into the industry.
As was indicated earlier, improved technology has been developed in the
wheat starch-gluten industry. Hence, some question exists as to the
likelihood of new sources using prevalent technology. If prevalent tech-
nology is not used, then proposed NSPS standards may not be a strict
barrier to entry into the industry.
!_/ To assess NSPS effects, estimated pollution control capital and oper-
ating costs as shown for BPT and BAT above were applied (in 1977 and
1983 respectively) to approximate NSPS control costs.
-------
Table VI- 13. Net present values of model wheat starch processing
plant before and after the imposition of alternative
effluent treatment standards, with selected price
changes
Size of Price
Plant Increase
Medium 0.0
Medium 1 . 0
Medium 3, 0
Medium 5. 0
BPT BAT
NPV ot NPV of NPV of NPV of NPV of
j^lant Before BPT plant After BAT Plant After
i Controls Controls Controls Controls Controls
>_._____.__ /
-------
Table VI-14. Net present value analysis of a new source model wheat
starch processing plant before and after the imposition
of alternative effluent treatment standards, with selected
price changes _'
Plant
Size
Price
NPV of
Plant Before
Increase' Controls
BPT
BAT
NPV of NPV of NPV of NPV of
BPT Plant After BAT Plant After
Controls Controls Controls Controls
--- ($000)
Medium
Medium
Medium
Medium
0.
1.
3.
5.
0
0
0
0
368. 1
491. 5
763. 9
982.8
-1
-1
-1
-1
355.
355.
355.
355.
5
5
5
5
-987.
-864.
-618.
-372.
4
0
5
7
-33.
-33.
-33.
-33.
7
7
7
7
-1021. 1
-897. 7
-652. 2
-406. 3
NPV analysis utilizing replacement cost investments, and a 9% average
cost of capital. BPT and BAT control requirements equal to the exist-
ing plant proposed standards.
Alternative price increases (assumed) reflect an average composite
increase in both starch and gluten products such that sales revenue
is increased by the percentage shown. Three levels are shown to
indicate sensitivity of results to price changes.
VI-26
-------
No definitive answer can yet be made concerning the latter issues,
but the following summary of prospective conditons in the industry is
presented as a guide to possible further impacts of the proposed guide-
lines.
Presently, two new wheat starch-gluten plants are under construction.
Both have introduced improved technologies (wet processing techniques
with patents pending) that are anticipated to substantially reduce water
usage and waste flows. One plant will have a capacity comparable to a
2, 000 cwt/day plant (although it is not strictly comparable because of
different raw material inputs and waste flow characteristics); the second
plant is a pilot plant only.
Both plants are expected to come on-stream in the near future, and only
then will valid operating data become available to the firms. Thus, it is
not yet possible to ascertain future aggregate production and marketing
impacts of the plants on existing markets (especially gluten markets).
It is known, however, that preliminary feasibility studies for the con-
struction of additional plants by these firms are underway. Final studies
would presumably be completed following a trial period of actual oper-
ations in the first plants.
4. Other Effects
The remaining point-source related types of impacts--production effects,
employment effects, community effects and balance-of-payment effects--
are considered minimal due to the nature of this industry. Six of the seven
existing plants are not affected directly by the guidelines of this study;
although it is'noted that these plants are expected to incur an increase in
the cost of operation due to increased surcharges from their respective
municipal plants. Industry reactions to prospective changes in treatment
charges are varied, but price increases, especially for gluten, are ex-
pected.
t
Two other whet^t starch plants examined by DPRA for this study, both
of which have $scontinued operation, were Colorado Milling and Elevator
Company and Hercules, Incorporated. The Hercules plant processed
wheat starch for use in making other Hercules products. It discontinued
operation due to location problems and state and local effluent guidelines
constraints (Hercules was dumping into a near-by lake). The Colorado
firm was not available for direct information concerning their closing.
VI-27
-------
VII. LIMITS OF THE ANALYSIS
The foregoing impact analysis was based upon data and information from
industry sources, from published secondary data sources, and from sub-
jective judgment. At various stages, the data utilized are subject to error.
The nature and scope of possible errors should be identified and limits
placed on the analysis accordingly. The purpose of this final section is
to present limits of the analysis in terms of accuracy, range of error and
critical assumptions.
General Accuracy
Financial information concerned with investments, operating costs and
revenues was in general not available for individual plants or firms in
the cereal and wheat starch processing industries. Consequently, the
financial aspects of the impact analysis were, of necessity, based upon
synthesized costs and returns for "representative" model plants w thin
each subindustry studied. The accuracy of the financial data used is
difficult to measure, however, it is believed that the data used are
representative. Various checks were made to establish the reasonableness
of the data used.
The requisite data were developed by DPRA from a variety of sources
including published materials from universities and government agencies,
previous studies done by DPRA, information obtained from industry
sources including trade associations, published financial performance
data sources, and from private individuals knowledgeable of the industry.
A variety of crosschecks were made using published information from the
Internal Revenue Service, Standard and Poors. Dun and Bradstreet and
other financial data sources to ascertain whether the simulated perform-
ance experienced in the respective industries. Based on these crosschecks,
it is believed that the model plants are representative and suitable for
assessing the incremental impacts of pollution controls.
It is noted that in the recent past the grain commodity markets in general
(including corn, wheat and rice) have be->n exceptionally volatile and
record high prices have been established. These prices directly affect
the cereal and wheat starch processing industries and the full reper-
cussions on these industries are not yet known.
VII-1
-------
Water pollution control costs, were provided by EPA (and Sverdrup &
Parcel and Associates), These data were developed for typical plants
within each subindustry studied. DPRA adjusted or scaled these data
as described above to reflect the general price level changes but there
may be considerable inaccuracy involved.
However, given the accuracy of the r Dilution control costs to be accept-
able, it is believed that Mie analysis represents a usefully accurate
evaluation of the economic impact of the proposed effluent guidelines on
the cereal and wheat ctar;-h processing industries as they currently exist.
1. Errors in Data
Estimated data error lariges as. an average for the industry are as follows:
Error Range
1. Information regarding the organization
and structure of Jbe industry, number,
location, and size of plants, and other
information descriptive of industry segments + 5
2. Price information of products and raw
materials +_ 20
3. Cost information for plant investments and
opeiating coats +_ 15
4. Financial information concerning the
industries +_ 1 5
5. Salvage values of plants and equipment +_ 20
6. Water pollution control costs " Unknown
7. Plant closxires +_ 5
Critical Assumptions
In order to complete this analysis of the industries within the scope of
study established, a variety of assumptions were required. Some critical
assumptions were applicable to;:il segments studied, while others-were
specific to a given subir.dustry. The main assumptions deserving further
comment are described below.
VII-2
-------
Representativeness of Model Plants. It is difficult to represent an industry
or subindustry with only 1 to 3 model plant situations when there are
actually many sizes and types of plants in the industry. In the industries
studied, the most difficult one to simply represent was the ready-to-eat
cereal industry. No two plants in this industry are alike because numer-
ous end-products and product mixes can be produced. The smaller plants
in the industry may not be adequately represented.
Model Plant Cost Data. Secondary or published investment and operating
cost data are minimal in the cereal and wheat starch industry. Engineer-
ing synthesis techniques had to be relied upon as a basis for constructing
most of the model plant cost data. Piecemeal published data and informa-
tion provided by knowledgeable industry sources were correlated with the
engineering data. The resulting model plant data are believed reasonable
and representative, but it remains that the data are not based on detailed
"book value" statistics.
Prices and Inflation. Because of the tremendous variability in product
prices during the past year, we felt that 1973 was atypical. Since we did
not have sufficient information to construct a profile over time for the
operation of the industry, 1972 was taken as a more "normal" year. As
a result, we based our "model" plant financial profiles on that year.
Regarding the impact of inflation on the model plant analyses, it is
commonly assumed that both costs and returns will be proportionately
affected by inflation such that the impact is offsetting. However, it is
noted that pollution control costs are increasing relatively faster than
other segments of the economy. Thus, one might question the accuracy
of the estimated 1977 and 1983 waste treatment costs relative to other
costs and prices.
Cost of Capital
The projected economic outlook for the U. S. economy is fraught with
rising inflation, raw material shortages, market uncertainties, etc.
Such factors contribute to upward pressures on the cost of debt and
equity capital. A 9. 0 percent average cost of capital rate was estimated
as being most applicable throughout this report. However, both higher
(11.0 percent) and lower (7.5 percent) rates were evaluated in a sensi-
tivity analysis of this factor, especially for the wheat starch processing
segment. A lower rate used in the NPV analysis reduces the likelihood
of plant closure based on the criterion used; a higher rate increases the
likelihood of plant closure following the imposition of controls. For ex-
ample, financing of wheat starch BAT control costs at 7. 5, 9.0 and 11.0
percent costs of capital results in NPV's for the baseline model plant are
as shown in Table VII-1. Also shown are the NPV's with selected price
changes of 1, 3 and 5 percent as were described in Chapter VI.
VII-3
-------
A further sensitivity analysis involving both the cost of capital assumptions
and the price assumptions for an existing model wheat starch plant is as
summarized in Table VII-2. In this case, the net present values of an
existing model plant are positive with a 5 percent price increase at both
the 7.5 and 9.0 percent cost of capital rates. In other words, an existing
plant would likely remain in operation if either it was forced off a munici-
pal system or plant management chose to build a private treatment system
However, with less than about a 5 percent average price increase, plant
closure would be expected based on the analysis herein.
B. Current State of Waste Water Treatment in the Industry
Data on waste water treatment in the industry was obtained from the
Development Document and utilized as reported therein.
Salvage Values
Salvage values of buildings, equipment and land will vary greatly from
one location to another and with the type and condition of structures and
equipment.
In. order to avoid problems which would be inherent in attempting to
establish differential salvage values, a set of 'rstandardtr assumptions
concerning salvage values was developed.
a. Land was salvaged at its 1972 value.
b. Buildings and equipment for conventional plants were
salvaged at a net amount equivalent to 10 percent of
their 1972 replacement value.
c. Net operating capital was recovered intact.
Water Pollution Control Costs
Data on water pollution control costs were supplied to DPRA by the
Effluent Guidelines Division of EPA. We are not in a position to evaluate
these costs but they were assumed to be accurate. A question does arise
regarding the applicability of the treatment facility requirements (and
costs) as they relate to new sources using the wet processing technology.
Waste flows are presumably to be significantly reduced, and waste flow
characteristics will probably differ from those sampled by S &t P as
reported in the Development Document. This further raises a question
as to the appropriateness of the BOD and SS guidelines as proposed.
VII-4
-------
Table VTI-1. Net present value sensitivity analysis for a new source
wheat starch processing plant, BAT standards, with
selected costs of capital and selected price changes
Plant Size
Medium
Medium
Medium
Medium
Net Present Values -NSPS (BAT controls)
Price Cost of Capital
Increase 7.5% 9-0% 11.0%
0.0 -869-1 -1021.1 -1178.9
1.0 -731.2 -897.7 -1071.2
3.0 -457.2 -652.2 -857.2
5.0 -182.6 -406.3 -642.7
Alternative price increases (assumed) reflect an average composite
increase in both starch and gluten products such that sales revenue
is increased by the percentage shown. Three levels are shown to
indicate sensitivity of results to price changes.
VII-5
-------
Table VII-2. Net present value sensitivity analysis for an existing
wheat starch processing plant, BAT with selected
costs of capital and selected price changes
Plant Size
Medium
Medium
Medium
Medium
Price 1 ,
Increase
0.0
1.0
3.0
5.0'
Net Present Values -Existing Plant (BAT controls)
Cost of Capital
7.%% 9.0% 11.0%
(* )
-471.5 -593.8 -723.
-333.6 -470.4 -615.
-59.6 -225.0 -401.
215.0 20.9 -187.
4
7
6
1
Alternative price increases (assumed) reflect an average composite
increase in both starch and gluten products such that sales revenue
is increased by the percentage shown. Three levels are shown to
indicate sensitivity of results to price changes.
VII-6
-------
i SHEET | EPA 230/1-74-03!: T
Ti.le jnj Subtitle
Economic Analysis of Proposed Effluent Guidelines for Animal
Feed, Breakfast Cereal and Wheat Starch Segments of the
Grain Mills Point Source Category
5. Repocc Date
August, 1974
7. Awhor(s)
8. Performing Organization Kept.
No.
9- Performing Organization, Name and Address
Development Planning and Research Associates, Inc.
P. O. Box 747, 200 Research Drive
10. Project/Task/ttorlc Unit No.
Task Order No. 13
Ma ihattan, Kansas
6502
11. Contract/Grant No.
Contra ct I\o.
68-01-1: 33
12. Sponsoring Organization Name and Address
Environmental Protection Agency
Waterside Mall
4tn and M Strasts, S.W.
Wa '-ington. D. C. 20460
13. Type or Repott i Period
Covered
1 Report
14.
15. Supplementary .Voces
16.
". JSfacts.
T!:e economic impacts of proposed effluent limitations guidelines on three seg-
ments of the grain milling industry were assessed: animal feed (SIC 2042) breakfast
cereal (2043) and wheat starch-gluten (2046) processing. The analysis included classi-
fication and description of types of firms and plants, evaluation of pricing mechanisms
and relationships and financial profiles of selected model plants. Financial impacts
of proposed effluent treatment tecunology were assessed in terms of price, industry
returns, and production volume. Employment, community impact and international
trade effects were also assessed. Limits of the analysis were stated.
Overall, the proposed controls of this study (point source category only) will
neither directly nor seriously impact the three segments studied in the short run.
Water effluent problems of the animal feed segment are inconsequential and detailed
assessments were not required. Virtually ail breakfast cereal and wheat starch
Key Uords ano Document Analysis. 17o. Descriptors ~~
Water pollution, economic analysis, economics, animal feed, breakfast cereal,
wheat starch, vital wheat gluten, food, pollution, industrial wastes , demand, supply,
prices, variable costs, fixed costs, fixed investment, discounted cash flow.
17b. Idcntifiers/Open-Endej Terms 02 Agriculture, B - Agriculture economics
05 Behavioral and Social Sciences, C - economics
17c. COMTI Fit IJ/r.f ,up
' U Ji. JMuty it jttr.ii.-nt
IV. >Ck^f'!\.
Kef >rt i
-, - -'-
20. .Vv ura > < ,.i ..-, j t u,i
21. t-.j.
120
-------
16. Abstracts (continued)
processing plants are connected to municipal treatment systems and this
minimizes applicability of the proposed guidelines. The breakfast cereal
industry is sufficiently viable to withstand proposed costs for pollution
control facilities if required. However, the potential impacts of the
guidelines on the wheat starch segment are such that new entrants into
the industry would not be expected if private treatment systems were
required. The industry growth prospects for the wheat starch processing
segment are thus uncertain.
------- |